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Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws

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  • Glaeser, Edward L
  • Scheinkman, Jose

Abstract

Interest 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 Info

Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 41 (1998)
Issue (Month): 1 (April)
Pages: 1-36

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Handle: RePEc:ucp:jlawec:v:41:y:1998:i:1:p:1-36

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  1. Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October.
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Cited by:
  1. Khan, Feisal, 2010. "How 'Islamic' is Islamic Banking?," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 805-820, December.
  2. Rene M. Stulz & Rohan Williamson, 2001. "Culture, Openness, and Finance," NBER Working Papers 8222, National Bureau of Economic Research, Inc.
  3. McKernan, Signe-Mary & Ratcliffe, Caroline & Kuehn, Daniel, 2013. "Prohibitions, price caps, and disclosures: A look at state policies and alternative financial product use," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 207-223.
  4. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
  5. Bodenhorn, Howard, 2007. "Usury ceilings and bank lending behavior: Evidence from nineteenth century New York," Explorations in Economic History, Elsevier, vol. 44(2), pages 179-202, April.
  6. Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "Socially responsible investments: Institutional aspects, performance, and investor behavior," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1723-1742, September.
  7. Koyama, Mark, 2010. "Evading the 'Taint of Usury': The usury prohibition as a barrier to entry," Explorations in Economic History, Elsevier, vol. 47(4), pages 420-442, October.
  8. Reed, Clyde G. & Bekar, Cliff T., 2003. "Religious prohibitions against usury," Explorations in Economic History, Elsevier, vol. 40(4), pages 347-368, October.

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