Only Twice as Much: A Rule for Regulating Lenders
AbstractPresent-day policies aiming to improve the performance of credit markets, such as group lending or creation of collateral, typically aim to change incentives for borrowers. In contrast, premodern credit market interventions, such as usury laws, often targeted the behavior of lenders. We describe and analyze a norm that, although widespread, has escaped scholarly attention: a ceiling on interest accumulation, which limits it to the amount of the original principal. We interpret this rule, which is found in Hindu, Roman, and Chinese legal traditions, as giving lenders the incentive to find more capable borrowers, who will be able to repay early, thereby improving the allocation of capital. We document the consistency between our explanation and the rationale offered by the policy makers. (c) 2010 by The University of Chicago. All rights reserved..
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Economic Development and Cultural Change.
Volume (Year): 58 (2010)
Issue (Month): 4 (07)
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Web page: http://www.journals.uchicago.edu/EDCC/
Other versions of this item:
- Mandar Oak & Anand Swamy, 2007. "Only Twice As Much: A Rule for Regulating Lenders," Department of Economics Working Papers 2007-06, Department of Economics, Williams College.
- Mandar Oak & Anand Swamy, 2007. "Only Twice As Much: A Rule for Regulating Lenders," Center for Development Economics 2007-03, Department of Economics, Williams College.
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- K1 - Law and Economics - - Basic Areas of Law
- N2 - Economic History - - Financial Markets and Institutions
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