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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

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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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Handle: RePEc:nbr:nberwo:12851

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Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
N2 - Economic History - - Financial Markets and Institutions
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Becker, Bo, 2006. "City Size and Financial Development," SIFR Research Report Series 46, Institute for Financial Research. [Downloadable!]
  2. Hirshleifer, David, 2007. "Psychological Bias as a Driver of Financial Regulation," MPRA Paper 5129, University Library of Munich, Germany. [Downloadable!]
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  3. Attiya Y. Javid & Robina Iqbal, 2007. "External Financial Resource Management by Listed Pakistani Firms," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 449-464. [Downloadable!]
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