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The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

  • Efraim Benmelech
  • Tobias J. Moskowitz

We investigate the causes and consequences of financial regulation by studying the political economy of U.S. state usury laws in the 19th century. We find evidence that usury laws were binding and enforced and that lending activity was affected by rate ceilings. Exploiting the heterogeneity across states and time in regulation, enforcement, and market conditions, we find that regulation tightens when it is less costly and when it coexists with other economic and political restrictions that exclude certain groups. Furthermore, the same determinants of financial regulation that favor one group (and restrict others) are associated with higher (lower) future economic growth rates. The evidence suggests regulation is the outcome of private interests using the coercive power of the state to extract rents from other groups, highlighting the endogeneity of financial development and growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12851.

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Date of creation: Jan 2007
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Publication status: published as 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, 06.
Handle: RePEc:nbr:nberwo:12851
Note: CF DAE
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