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The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

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  • EFRAIM BENMELECH
  • TOBIAS J. MOSKOWITZ

Abstract

Financial regulation was as hotly debated a political issue in the 19th century as it is today. We study the political economy of state usury laws in 19th century America. Exploiting the wide variation in regulation, enforcement, and economic conditions across states and time, we find that usury laws when binding reduce credit and economic activity, especially for smaller firms. We examine the motives of regulation and find that usury laws coincide with other economic and political policies favoring wealthy political incumbents, particularly when they have more voting power. The evidence suggests financial regulation is driven by private interests capturing rents from others rather than public interests protecting the underserved. Copyright (c) 2010 the American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 65 (2010)
Issue (Month): 3 (06)
Pages: 1029-1073

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Handle: RePEc:bla:jfinan:v:65:y:2010:i:3:p:1029-1073

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  1. Six Types of Libertarian Arguments Against Government Action
    by Ilya Somin in the volokh conspiracy on 2010-12-02 05:11:07
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Cited by:
  1. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  2. Attiya Y. Javid & Robina Iqbal, 2010. "Corporate Governance in Pakistan : Corporate Valuation, Ownership and Financing," Governance Working Papers 22830, East Asian Bureau of Economic Research.
  3. Hauner, David & Prati, Alessandro & Bircan, Cagatay, 2013. "The interest group theory of financial development: Evidence from regulation," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 895-906.
  4. Lohse, Tim & Thomann, Christian, 2014. "Are Bad Times Good News for the Securities and Exchange Commission?," Working Paper Series in Economics and Institutions of Innovation 371, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  5. Luca Agnello & Sushanta K. Mallick & Ricardo M. Sousa, 2012. "Financial Reforms and Income Inequality," NIPE Working Papers, NIPE - Universidade do Minho 21/2012, NIPE - Universidade do Minho.
  6. Eric Hilt, 2014. "History of American Corporate Governance: Law, Institutions, and Politics," NBER Working Papers 20356, National Bureau of Economic Research, Inc.
  7. Hirshleifer, David, 2007. "Psychological Bias as a Driver of Financial Regulation," MPRA Paper 5129, University Library of Munich, Germany.
  8. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, vol. 116(3), pages 513-527, September.
  9. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(2), pages 233-250.
  10. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers 10-022/2, Tinbergen Institute, revised 11 Sep 2010.
  11. Chatterji, Aaron K. & Seamans, Robert C., 2012. "Entrepreneurial finance, credit cards, and race," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(1), pages 182-195.
  12. Becker, Bo, 2006. "City Size and Financial Development," SIFR Research Report Series, Institute for Financial Research 46, Institute for Financial Research.
  13. Mark Calabria, 2014. "On the Political Possibility of Separating Banking and the State," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 29(Fall 2014), pages 11-28.
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  15. Florian Buck, 2014. "Financial Regulation and the Grabbing Hand," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 11(4), pages 03-13, 01.
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  18. Wieneke, Axel & Gries, Thomas, 2011. "SME performance in transition economies: The financial regulation and firm-level corruption nexus," Journal of Comparative Economics, Elsevier, vol. 39(2), pages 221-229, June.
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