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In defence of usury laws

  • Giuseppe Coco
  • David de Meza

This paper shows that if moral hazard leads to credit rationing, an appropriate usury law must raise social welfare. Under market clearing, a usury law is always beneficial if funds are inelastically supplied. When entrepreneurial heterogeneity is introduced, an improvement arises even when the supply of funds is elastic. These results apply also in costly stateverification models and diversionary models of the credit market. Finally, a usury law proves useful in eliminating low-yielding projects when some entrepreneurs display excess optimism.

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File URL: http://eprints.lse.ac.uk/25042/
File Function: Open access version.
Download Restriction: no

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 25042.

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Length: 29 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:ehl:lserod:25042
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

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  1. Avio, Kenneth L, 1974. "On the Effects of Statutory Interest Rate Ceilings," Journal of Finance, American Finance Association, vol. 29(5), pages 1383-95, December.
  2. Manove, M. & Padilla, A.J., 1997. "Banking (Conservatively) with Optimists," Papers 9718, Centro de Estudios Monetarios Y Financieros-.
  3. Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
  4. De Meza, D. & Southey, C., 1995. "The Borrower's Curse: Optimism, Finance and Enterpreneurship," Discussion Papers 9502, Exeter University, Department of Economics.
  5. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  6. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  7. Peterson, Richard L, 1983. " Usury Laws and Consumer Credit: A Note," Journal of Finance, American Finance Association, vol. 38(4), pages 1299-1304, September.
  8. Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(4), pages 439-56, November.
  9. Greer, Douglas F, 1974. "Rate Ceilings, Market Structure, and the Supply of Finance Company Personal Loans," Journal of Finance, American Finance Association, vol. 29(5), pages 1363-82, December.
  10. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  11. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  12. Maurice B. Goudzwaard, 1968. "Price Ceilings And Credit Rationing," Journal of Finance, American Finance Association, vol. 23(1), pages 177-185, 03.
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