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In Defense of Usury Laws

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  • GIUSEPPE COCO
  • DAVID DE MEZA

Abstract

Usury law is often criticized by economists for curtailing lending and thus creating deadweight costs. This paper shows that if moral hazard leads to credit rationing, a just-binding usury law creates a deadweight "gain." This property also holds in most market-clearing equilibria. Independent of social insurance benefits, or curbing present-biased preferences, interest rate caps have merit. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 8 (December)
Pages: 1691-1703

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:8:p:1691-1703

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  1. Manove, M. & Padilla, A.J., 1997. "Banking (Conservatively) with Optimists," Papers 9718, Centro de Estudios Monetarios Y Financieros-.
  2. De Meza, D. & Southey, C., 1995. "The Borrower's Curse: Optimism, Finance and Enterpreneurship," Discussion Papers 9502, Exeter University, Department of Economics.
  3. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  4. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  5. Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
  6. Greer, Douglas F, 1974. "Rate Ceilings, Market Structure, and the Supply of Finance Company Personal Loans," Journal of Finance, American Finance Association, vol. 29(5), pages 1363-82, December.
  7. Peterson, Richard L, 1983. " Usury Laws and Consumer Credit: A Note," Journal of Finance, American Finance Association, vol. 38(4), pages 1299-1304, September.
  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  9. Avio, Kenneth L, 1974. "On the Effects of Statutory Interest Rate Ceilings," Journal of Finance, American Finance Association, vol. 29(5), pages 1383-95, December.
  10. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  11. Maurice B. Goudzwaard, 1968. "Price Ceilings And Credit Rationing," Journal of Finance, American Finance Association, vol. 23(1), pages 177-185, 03.
  12. Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(4), pages 439-56, November.
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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. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, vol. 116(3), pages 513-527, September.
  3. Michel Bellet, 2011. "Saint-Simonism and Utilitarianism : the history of a paradox. Bentham’s Defence of Usury under Saint-Amand Bazard’s Interpretation," Working Papers 1135, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  4. Arnold, Lutz G. & Reeder, Johannes & Trepl , Stefanie, 2010. "Single-Name Credit Risk, Portfolio Risk, and Credit Rationing," University of Regensburg Working Papers in Business, Economics and Management Information Systems 448, University of Regensburg, Department of Economics.
  5. Michel Bellet, 2011. "Saint-Simonism and Utilitarianism: the history of a paradox. Bentham's Defence of Usury under Saint-Amand Bazard's Interpretation," Working Papers halshs-00654847, HAL.

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