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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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2010.01560.x
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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. 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.
  2. Chatterji, Aaron K. & Seamans, Robert C., 2012. "Entrepreneurial finance, credit cards, and race," Journal of Financial Economics, Elsevier, vol. 106(1), pages 182-195.
  3. 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).
  4. Tahoun, Ahmed, 2014. "The role of stock ownership by US members of Congress on the market for political favors," Journal of Financial Economics, Elsevier, vol. 111(1), pages 86-110.
  5. Cagatay Bircan & David Hauner & Alessandro Prati, 2012. "The interest group theory of financial development: evidence from regulation," Working Papers 150, European Bank for Reconstruction and Development, Office of the Chief Economist.
  6. Luca Agnello & Sushanta K. Mallick & Ricardo M. Sousa, 2012. "Financial Reforms and Income Inequality," NIPE Working Papers 21/2012, NIPE - Universidade do Minho.
  7. repec:dgr:uvatin:2010022 is not listed on IDEAS
  8. Attiya Y. Javid & Robina Iqbal, 2007. "External Financial Resource Management by Listed Pakistani Firms," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 449-464.
  9. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers 10-022/2, Tinbergen Institute, revised 11 Sep 2010.
  10. Hirshleifer, David, 2007. "Psychological Bias as a Driver of Financial Regulation," MPRA Paper 5129, University Library of Munich, Germany.
  11. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2013. "Mixing Business with Politics: Political Participation by Entrepreneurs in China," Working Paper Series 2013-28, Stockholm China Economic Research Institute, Stockholm School of Economics.
  12. 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.
  13. Becker, Bo, 2006. "City Size and Financial Development," SIFR Research Report Series 46, Institute for Financial Research.
  14. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
  15. Florian Buck, 2014. "Financial Regulation and the Grabbing Hand," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 11(4), pages 03-13, 01.

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