RESEARCH

Working Papers

Credit-driven crime cYCLES : THE CONNECTION BETWEEN INCARCERATION AND ACCESS TO CREDIT

with Abhay Aneja

Incarceration directly affects a meaningful share of the U.S. adult population, and affects the society at large through its effects on future criminal activity. We document a financial channel pivotal to our understanding of the criminal cycle. We show that incarceration significantly reduces access to credit that in turn leads to substantial increases in recidivism, creating a perverse feedback loop. To show this, we examine: (i) the causal effects of incarceration on access to credit, (ii) how incarceration-induced information asymmetries distort efficient credit allocation, and (iii) the causal impact of lack of access to credit on recidivism. Exploiting random assignment of criminal cases to courtrooms, we document significant post-release reductions in credit and in credit scores. Testing for adverse or advantageous selection in loans given to ex-convicts, we find no evidence that ex-convicts are stigmatized by lenders. We find, instead, that labor market distortions in the form of suppressed wages for ex-convicts spillover into credit markets because lenders, who use income to screen applicants, are unable to form reliable estimates of default risk. This informational distortion through the income channel is worsened by the ex-convicts' inability to service their debt while incarcerated, which further drives credit flows to ex-convicts below the full-information benchmark. Finally, using a regression discontinuity design, we show this loss of access feeds back into higher recidivism rates, thus amplifying the effects of incarceration on recidivism. In this regard, we show that the crime-reduction goal of incarceration is undermined by the financial distortions that imprisonment creates. More generally, our findings highlight how policy goals can be undermined by unintended and self-induced market information asymmetries and incompleteness.

 

How Corporate Debt Perpetuates Labor Market Disparities:  
The Link Between Capital Structure, Unemployment, and Wages

with Abhay Aneja

This paper studies corporate debt as a transmission mechanism for unemployment risk in labor markets. While high firm-specific financial leverage increases a worker's likelihood of  becoming  unemployed i.e., unemployment  risk, high aggregate corporate leverage affects the value of outside jobs and hence decreases the worker's outside option.  We show that financial leverage can increase or decrease wages depending on how labor market conditions affect the trade-off between compensation for unemployment risk and a weaker outside option. The resulting effect is that leverage dampens fluctuations in wages and amplifies fluctuations in unemployment. When increases in the cost of labor are a result of employment regulations, firms issue more debt, mitigate the regulatory costs, and weaken the regulation's intended objectives by increasing unemployment risk. Consistently with this, we present evidence that firms increased corporate debt following the passage of anti-discrimination regulation during the Civil Rights Movement and that this increase in corporate debt disproportionately exposed minority workers to higher levels of unemployment risk that persist today.

 

The effect of political power on Labor Market inequality: Evidence from the 1965 Voting Rights Act

with Abhay Aneja

A central concern for racial and ethnic minorities living in democratic societies is having access to opportunities for economic advancement equal to their majority counterparts. In this paper, we examine whether and how democratic institutions facilitate such advancement. We explore how the political re-enfranchisement of black Americans in the U.S. South, stemming from the passage of the 1965 Voting Rights Act (VRA), contributed to improvements in relative economic status during the 1960s and 1970s. Using spatial and temporal variation arising from the federal enforcement provision of the VRA, we document that counties where voting rights were more strongly protected experienced larger reductions in the black-white wage gap between 1950 and 1980. We then show how the VRA’s effect on the relative wages of black Americans operates through two demand-side channels. First, the VRA contributed to the expansion of public employment opportunities. Second, in line with previous work on the importance of civil rights laws, the VRA contributed to and complemented the enforcement of labor market policies such as affirmative action and anti-discrimination laws.