Credit Rationing and the Welfare Gain from Usury Laws
This paper demonstrates that when a rationing equilibrium occurs in credit markets due to adverse selection effects of the interest rate, it is necessarily a multiple contracts (i.e. multiple interest rates) equilibrium with rationing at one contract. Some consequent arguments for a welfare improving role of usury laws, based on the possibility of increasing the share of low-risk projects carried out in equilibrium, are then examined.
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|Date of creation:||1997|
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