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Only Twice as Much: A Rule for Regulating Lenders

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  • Mandar Oak
  • Anand Swamy

Abstract

Present-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 Info

Article provided by University of Chicago Press in its journal Economic Development and Cultural Change.

Volume (Year): 58 (2010)
Issue (Month): 4 (07)
Pages: 775-803

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Handle: RePEc:ucp:ecdecc:v:58:y:2010:i:4:p:775-803

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  1. Manove, Michael & Padilla, Atilano Jorge, 1998. "Banking (Conservatively) With Optimists," CEPR Discussion Papers 1918, C.E.P.R. Discussion Papers.
  2. Michael Manove & A. Jorge Padilla & Marco Pagano, 1998. "Collateral vs. Project Screening: A Model of Lazy Banks," CSEF Working Papers 10, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Kranton, Rachel E. & Swamy, Anand V., 1999. "The hazards of piecemeal reform: british civil courts and the credit market in colonial India," Journal of Development Economics, Elsevier, vol. 58(1), pages 1-24, February.
  4. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
  5. Carter, Michael R., 1988. "Equilibrium credit rationing of small farm agriculture," Journal of Development Economics, Elsevier, vol. 28(1), pages 83-103, February.
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