The Financial Power of the Powerless: Socio-Economic Status and Interest Rates under Partial Rule of Law

67 Pages Posted: 23 Oct 2014 Last revised: 25 Mar 2016

Timur Kuran

Duke University - Department of Economics

Jared Rubin

Chapman University - The George L. Argyros School of Business & Economics

Date Written: March 23, 2016

Abstract

In advanced economies interest rates generally vary inversely with the borrower’s socio-economic status, because status tends to depend inversely on default risk. Both of these relationships depend critically on the impartiality of the law. Specifically, they require a lender to be able to sue a recalcitrant borrower in a sufficiently impartial court. Where the law is markedly biased in favor of elites, privileged socio-economic classes will pay a surcharge for capital. This is because they pose a greater risk to lenders who have limited means of punishing them. Legal power, as measured by privileges before the law, thus undermines financial power, which is the capacity to borrow cheaply. Developing the underlying theory, this paper also tests it through a data set consisting of judicial records from Ottoman Istanbul, 1602-1799. Pre-modern Istanbul offers an ideal testing ground because rule of law existed but was highly partial. Court data show that titled elites, men, and Muslims all paid higher interest rates conditional on various loan characteristics. A general implication is that elites can benefit from instituting impartially enforced rules in financial markets. The beginnings of legal modernization in the Ottoman Empire included the establishment of relatively impartial commercial courts.

Keywords: Rule of law, elite, status, religion, gender, court, interest rate, credit, financial market, Ottoman Empire, Istanbul, Islam, Islamic law, Sharia

JEL Classification: G10, K42, N2, N4, N95

Suggested Citation

Kuran, Timur and Rubin, Jared, The Financial Power of the Powerless: Socio-Economic Status and Interest Rates under Partial Rule of Law (March 23, 2016). Economic Research Initiatives at Duke (ERID) Working Paper No. 175. Available at SSRN: https://ssrn.com/abstract=2512930 or http://dx.doi.org/10.2139/ssrn.2512930

Timur Kuran (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Jared Rubin

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Drive
Orange, CA 92866
United States

HOME PAGE: http://www.jaredcrubin.com

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