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Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from Nineteenth Century

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  • Howard Bodenhorn

Abstract

Few pieces of economic regulation are ubiquitous as usury limits. Similarly, few economic principles are as widely accepted as the belief that interference with freely contracted prices leads to market distortions, and many studies of financial markets find that usury limits negatively affect credit availability. This study shows that when no regulatory authority monitors and stands ready to punish violators of the usury limit when intermediaries and borrowers form long-term relationships, banks and borrowers regularly contract for interest rates in excess of the usury ceiling. Time series analysis reveals limited effects on credit availability when market rates exceed the usury ceiling. Cross-sectional analysis of individual loan contracts also shows that the positive effect of a long-term relationship offsets the negative effect of the usury limit on credit availability.

Suggested Citation

  • Howard Bodenhorn, 2005. "Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from Nineteenth Century," NBER Working Papers 11734, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11734
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    References listed on IDEAS

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    Cited by:

    1. Efraim Benmelech & Tobias J. Moskowitz, 2010. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," Journal of Finance, American Finance Association, vol. 65(3), pages 1029-1073, June.

    More about this item

    JEL classification:

    • N2 - Economic History - - Financial Markets and Institutions
    • N8 - Economic History - - Micro-Business History
    • G2 - Financial Economics - - Financial Institutions and Services

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