Saturday, 12 December 2015

Why you should take a copy of your credit report on a first date

A long-standing result in the economics of relationships is assortative matching (or mating) - that people tend to match with others who are like them, whether in terms of age, ethnicity, income, education, or whatever. But what about unobservable characteristics, like trustworthiness - are people similar to their partners in terms of how trustworthy they are?

The interesting thing about unobservable characteristics is that they are, well, unobservable. They are a form of asymmetric information - you know how trustworthy you are, but potential partners do not know. And hidden characteristics like trustworthiness can lead to adverse selection, if some people can take advantage of the information asymmetry (which less trustworthy people, almost by definition, are likely to do).

As I've noted before in the context of dating:
An adverse selection problem arises because the uninformed parties cannot tell high quality dates from low quality dates. To minimise the risk to themselves of going on a horrible date, it makes sense for the uninformed party to assume that everyone is a low-quality date. This leads to a pooling equilibrium - high-quality and low-quality dates are grouped together because they can't easily differentiate themselves. Which means that people looking for high-quality dates should probably steer clear of online dating.
What you need is a way of signalling that you are trustworthy. With signalling, the informed party finds some way to credibly reveal the private information (that they are trustworthy) to the uninformed party. There are two important conditions for a signal to be effective: (1) it needs to be costly; and (2) it needs to be more costly to those with lower quality attributes (those who are less trustworthy). These conditions are important, because if they are not fulfilled, then those with low quality attributes (less trustworthy people) could still signal themselves as having high quality attributes (being more trustworthy). But what would make a good signal of trustworthiness?

Coming back to assortative matching for the moment, a recent working paper by Jane Dokko (Brookings), Geng Li (Federal Reserve Bank), and Jessica Hayes (UCLA) provides some interesting evidence that is suggestive that people match on their credit scores (as well as education, etc.). Credit scores are a measure of creditworthiness (and an indirect measure of trustworthiness), and the paper considers how credit scores are associated with relationship 'success' or 'failure'.

The authors use data from the Federal Reserve Bank of New York Consumer Credit Panel, which has about 12 million 'primary sample' records and about 30 million other consumer records (of people who live with those in the primary sample). Given some constraints in the dataset, the authors use an algorithmic approach to identify the formation of new cohabitating relationships (and the dissolution of previous relationships), giving them a sample of nearly 50,000 new couples.

The authors find that:
...conditional on observable socioeconomic and demographic characteristics, individuals in committed relationships have credit scores that are highly correlated with their partners’ scores. Their credit scores tend to further converge with their partners’, particularly among those in longer-lasting relationships. Conversely, we find the initial match quality of credit scores is strongly predictive of relationship outcomes in that couples with larger score gaps at the beginning of their relationship are more likely to subsequently separate. While we find that part of such a correlation is attributable to poorly matched couples’ lower chances of using joint credit accounts, acquiring new credit, and staying away from financial distress, the mismatch in credit scores seems to be important for relationship outcomes beyond these credit channels.
We also provide suggestive evidence that credit scores reveal information about one’s underlying trustworthiness in a similar way as subjective, survey-based measures. Moreover, we find that survey-based measures of trustworthiness are also associated with relationship outcomes, which implies that differentials in credit scores may also reflect mismatch in couples’ trustworthiness.
In other words, there is assortative matching in terms of credit scores, and since credit scores reveal information about trustworthiness, that suggests there is also assortative matching in terms of trustworthiness. In other words, more trustworthy people are likely looking for partners who are also more trustworthy.

Which brings us back to signalling - if you want to provide a signal of your trustworthiness, you might want to consider providing your potential date with a verified copy of your credit report. It's costly to provide (perhaps not in monetary terms, but there is an intrinsic cost of revealing your credit information to someone else!), and more costly if you have a lower credit score (since you face a higher probability of your date deciding they have something better to do with their Saturday night).

[HT: Marginal Revolution]

No comments:

Post a Comment