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

Edward Glaeser and Jose Scheinkman

No 4954, NBER Working Papers from National Bureau of Economic Research, Inc

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).

JEL-codes: G28 O40 (search for similar items in EconPapers)
Date: 1994-12
Note: EFG
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Published as Journal of Law and Economics, Vol. 41, no. 1 (April 1998): 1-36.

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Journal Article: Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws (1998)
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