Neither a Borrower Nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws

56 Pages Posted: 27 Sep 2000 Last revised: 29 Jul 2010

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

José Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1994

Abstract

Interest rate restrictions are among the most pervasive forms of economic regulations. This paper explains that these restrictions can be explained as a means of primitive social insurance. Interest rate limits are Pareto improving because agents borrow when they have temporary negative income shocks -- interest rate restrictions transfer wealth to agents who have received those negative shocks and whose marginal utility of income is high. We assume that these shocks are not otherwise insurable because of problems related to asymmetric information or the difficulties inherent in writing complex contracts. The model predicts that interest rate restriction will be tighter when income inequality is high (and impermanent) and when growth rates are low. Data from U.S. states' regulations supports a connection between inequality and usury laws. The history of usury laws suggests that this social insurance mechanism is one reason why usury laws persist, but it also suggests that usury laws have had different functions across time (eg. rent-seeking, limiting agency problems within the church, limiting overcommitment of debts, and attacking commerce generally).

Suggested Citation

Glaeser, Edward L. and Scheinkman, José, Neither a Borrower Nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws (December 1994). NBER Working Paper No. w4954. Available at SSRN: https://ssrn.com/abstract=226554

Edward L. Glaeser (Contact Author)

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