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).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4954.
Date of creation: Dec 1994
Date of revision:
Publication status: published as Journal of Law and Economics, Vol. 41, no. 1 (April 1998): 1-36.
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Glaeser, Edward L & Scheinkman, Jose, 1998. "Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 41(1), pages 1-36, April.
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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.:
- Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 893-921, October.
- Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "Socially responsible investments: Institutional aspects, performance, and investor behavior," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(9), pages 1723-1742, September.
- Bodenhorn, Howard, 2007. "Usury ceilings and bank lending behavior: Evidence from nineteenth century New York," Explorations in Economic History, Elsevier, Elsevier, vol. 44(2), pages 179-202, April.
- Stulz, Rene M. & Williamson, Rohan, 2003.
"Culture, openness, and finance,"
Journal of Financial Economics, Elsevier,
Elsevier, vol. 70(3), pages 313-349, December.
- Khan, Feisal, 2010. "How 'Islamic' is Islamic Banking?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(3), pages 805-820, December.
- Jonathan Zinman, 2008.
"Restricting consumer credit access: household survey evidence on effects around the Oregon rate cap,"
08-32, Federal Reserve Bank of Philadelphia.
- Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(3), pages 546-556, March.
- Koyama, Mark, 2010. "Evading the 'Taint of Usury': The usury prohibition as a barrier to entry," Explorations in Economic History, Elsevier, Elsevier, vol. 47(4), pages 420-442, October.
- Reed, Clyde G. & Bekar, Cliff T., 2003. "Religious prohibitions against usury," Explorations in Economic History, Elsevier, Elsevier, vol. 40(4), pages 347-368, October.
- 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, Elsevier, vol. 95(C), pages 207-223.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.