Only Twice As Much: A Rule for Regulating Lenders
AbstractPresent-day policies aiming to improve the performance of credit markets, such as group-lending or creation of collateral, typically aim to change incentives for borrowers. In contrast, pre-modern credit market interventions, such as usury laws, often targeted the behavior of lenders. We describe and model a norm which, though widespread, has escaped scholarly attention: a stipulation that accumulated interest cannot exceed the original principal, irrespective of how much time has elapsed. We interpret this rule, which is found in Hindu, Roman, and Chinese legal traditions, as giving lenders the incentive to find more capable borrowers, who will be able to repay early, thereby improving the allocation of capital. We document the consistency between our explanation and the rationale offered by policy-makers.
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Bibliographic InfoPaper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2007-06.
Length: 32 pages
Date of creation: Jan 2007
Date of revision:
Publication status: published in Economic Development and Cultural Change (2010) Vol. 58, no. 4: 775-803.
Other versions of this item:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- K1 - Law and Economics - - Basic Areas of Law
- N2 - Economic History - - Financial Markets and Institutions
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