Credit Rationing and the Welfare Gain from Usury Laws

Giuseppe Coco ()

Discussion Papers from University of Exeter, School of Business and Economics

Abstract: This paper demonstrates that when a rationing equilibrium occurs in credit markets due to adverse selection effects of the interest rate, it is necessarily a multiple contracts (i.e. multiple interest rates) equilibrium with rationing at one contract. Some consequent arguments for a welfare improving role of usury laws, based on the possibility of increasing the share of low-risk projects carried out in equilibrium, are then examined.

Keywords: INFORMATION; REGULATION (search for similar items in EconPapers)
JEL-codes: D82 G28 G14 (search for similar items in EconPapers)
Date: 1997

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