Should Defaults be Forgotten? Evidence from Quasi-Experimental Variation

A previous version of this working paper was originally published in 2012.

By exploiting a quasi-experimental variation in retention times of negative credit information, we find that a prolonged retention time increases the need for and access to credit and reduces the likelihood to default. In both regimes, less than 27 percent of individuals default again within two years after removal, suggesting that only a minority is inherently high risk or, alternatively, removal of credit arrears induce borrowers to exert greater effort. Either interpretation raises the possibility that forgetting defaults is welfare enhancing.