Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws
AbstractInterest rate restrictions are among the most pervasive forms of economic regulations. This paper explains that these restrictions can be explained as a means of primitive social insurance. Interest rate limits are Pareto improving because agents borrow when they have temporary negative income shocks -- interest rate restrictions transfer wealth to agents who have received those negative shocks and whose marginal utility of income is high. We assume that these shocks are not otherwise insurable because of problems related to asymmetric information or the difficulties inherent in writing complex contracts. The model predicts that interest rate restriction will be tighter when income inequality is high (and impermanent) and when growth rates are low. Data from U.S. states' regulations supports a connection between inequality and usury laws. The history of usury laws suggests that this social insurance mechanism is one reason why usury laws persist, but it also suggests that usury laws have had different functions across time (eg. rent-seeking, limiting agency problems within the church, limiting overcommitment of debts, and attacking commerce generally).
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Law & Economics.
Volume (Year): 41 (1998)
Issue (Month): 1 (April)
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Web page: http://www.journals.uchicago.edu/JLE/
Other versions of this item:
- Edward L. Glaeser & Jose A. Scheinkman, 1994. "Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws," NBER Working Papers 4954, National Bureau of Economic Research, Inc.
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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