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In Defence of Usury Laws

Author

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  • David De Meza

    ()

  • Giuseppe Coco

Abstract

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 state-verification 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.

Suggested Citation

  • David De Meza & Giuseppe Coco, 2001. "In Defence of Usury Laws," FMG Discussion Papers dp369, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp369
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp369.pdf
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    References listed on IDEAS

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    1. 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 1343-1366, September.
    2. Michael Manove & A. Jorge Padilla, 1999. "Banking (Conservatively) with Optimists," RAND Journal of Economics, The RAND Corporation, pages 324-350.
    3. de Meza, David & Southey, Clive, 1996. "The Borrower's Curse: Optimism, Finance and Entrepreneurship," Economic Journal, Royal Economic Society, vol. 106(435), pages 375-386, March.
    4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    5. Peterson, Richard L, 1983. " Usury Laws and Consumer Credit: A Note," Journal of Finance, American Finance Association, vol. 38(4), pages 1299-1304, September.
    6. Crafton, Steven M, 1980. "An Empirical Test of the Effect of Usury Laws," Journal of Law and Economics, University of Chicago Press, vol. 23(1), pages 135-145, April.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    8. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    9. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, pages 159-179.
    10. 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 1363-1382, December.
    11. Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
    12. Avio, Kenneth L, 1974. "On the Effects of Statutory Interest Rate Ceilings," Journal of Finance, American Finance Association, vol. 29(5), pages 1383-1395, December.
    13. Maurice B. Goudzwaard, 1968. "Price Ceilings And Credit Rationing," Journal of Finance, American Finance Association, vol. 23(1), pages 177-185, March.
    14. Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(4), pages 439-456, November.
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    Cited by:

    1. Michel Bellet, 2011. "Saint-Simonism and Utilitarianism : the history of a paradox. Bentham’s Defence of Usury under Saint-Amand Bazard’s Interpretation," Working Papers 1135, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Guimarães, Bernardo & Salama, Bruno Meyerhof, 2017. "Contingent judicial deference: theory and application to usury laws," Textos para discussão 440, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    3. Michel Bellet, 2011. "Saint-Simonism and Utilitarianism: the history of a paradox. Bentham's Defence of Usury under Saint-Amand Bazard's Interpretation," Working Papers halshs-00654847, HAL.
    4. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, vol. 116(3), pages 513-527, September.
    5. Lutz G. Arnold & Johannes Reeder & Stefanie Trepl, 2014. "Single-name Credit Risk, Portfolio Risk and Credit Rationing," Economica, London School of Economics and Political Science, pages 311-328.
    6. Guimaraesy, Bernardo & Meyerhof Salama, Bruno, 2017. "Contingent judicial deference: theory and application to usury laws," LSE Research Online Documents on Economics 86146, London School of Economics and Political Science, LSE Library.
    7. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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