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The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

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  • Efraim Benmelech
  • Tobias J. Moskowitz

Abstract

We investigate the causes and consequences of financial regulation by studying the political economy of U.S. state usury laws in the 19th century. We find evidence that usury laws were binding and enforced and that lending activity was affected by rate ceilings. Exploiting the heterogeneity across states and time in regulation, enforcement, and market conditions, we find that regulation tightens when it is less costly and when it coexists with other economic and political restrictions that exclude certain groups. Furthermore, the same determinants of financial regulation that favor one group (and restrict others) are associated with higher (lower) future economic growth rates. The evidence suggests regulation is the outcome of private interests using the coercive power of the state to extract rents from other groups, highlighting the endogeneity of financial development and growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12851.

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Date of creation: Jan 2007
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Publication status: published as Efraim Benmelech & Tobias J. Moskowitz, 2010. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," Journal of Finance, American Finance Association, vol. 65(3), pages 1029-1073, 06.
Handle: RePEc:nbr:nberwo:12851

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  1. Six Types of Libertarian Arguments Against Government Action
    by Ilya Somin in the volokh conspiracy on 2010-12-02 05:11:07
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  1. Chatterji, Aaron K. & Seamans, Robert C., 2012. "Entrepreneurial finance, credit cards, and race," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(1), pages 182-195.
  2. Attiya Y. Javid & Robina Iqbal, 2010. "Corporate Governance in Pakistan: Corporate Valuation, Ownership and Financing," PIDE-Working Papers, Pakistan Institute of Development Economics 2010:57, Pakistan Institute of Development Economics.
  3. Agnello, Luca & Mallick, Sushanta K. & Sousa, Ricardo M., 2012. "Financial reforms and income inequality," Economics Letters, Elsevier, Elsevier, vol. 116(3), pages 583-587.
  4. repec:dgr:uvatin:2010022 is not listed on IDEAS
  5. Hirshleifer, David, 2007. "Psychological Bias as a Driver of Financial Regulation," MPRA Paper 5129, University Library of Munich, Germany.
  6. Cagatay Bircan & David Hauner & Alessandro Prati, 2012. "The interest group theory of financial development: evidence from regulation," Working Papers, European Bank for Reconstruction and Development, Office of the Chief Economist 150, European Bank for Reconstruction and Development, Office of the Chief Economist.
  7. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers, Tinbergen Institute 10-022/2, Tinbergen Institute, revised 11 Sep 2010.
  8. Attiya Y. Javid & Robina Iqbal, 2007. "External Financial Resource Management by Listed Pakistani Firms," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 46(4), pages 449-464.
  9. Eric Hilt, 2014. "History of American Corporate Governance: Law, Institutions, and Politics," NBER Working Papers 20356, National Bureau of Economic Research, Inc.
  10. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2013. "Mixing Business with Politics: Political Participation by Entrepreneurs in China," Working Paper Series 2013-28, Stockholm China Economic Research Institute, Stockholm School of Economics.
  11. Becker, Bo, 2006. "City Size and Financial Development," SIFR Research Report Series, Institute for Financial Research 46, Institute for Financial Research.
  12. Florian Buck, 2014. "Financial Regulation and the Grabbing Hand," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 11(4), pages 03-13, 01.
  13. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, Springer, vol. 116(3), pages 513-527, September.
  14. Tahoun, Ahmed, 2014. "The role of stock ownership by US members of Congress on the market for political favors," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(1), pages 86-110.
  15. 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).
  16. Wieneke, Axel & Gries, Thomas, 2011. "SME performance in transition economies: The financial regulation and firm-level corruption nexus," Journal of Comparative Economics, Elsevier, vol. 39(2), pages 221-229, June.
  17. Lohse, Tim & Thomann, Christian, 2014. "Are Bad Times Good News for the Securities and Exchange Commission?," Working Paper Series in Economics and Institutions of Innovation, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies 371, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  18. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(2), pages 233-250.

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