Abstract

https://ssrn.com/abstract=2512930
 


 



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


Timur Kuran


Duke University - Department of Economics

Jared Rubin


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

March 23, 2016

Economic Research Initiatives at Duke (ERID) Working Paper No. 175

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.

Number of Pages in PDF File: 67

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


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Date posted: October 23, 2014 ; Last revised: March 25, 2016

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

Contact Information

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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