Only Twice As Much: A Rule for Regulating Lenders

Mandar Oak () and Anand Swamy

No 2007-03, Center for Development Economics from Department of Economics, Williams College

Abstract: Present-day policies aiming to improve the performance of credit markets, such as group-lending or creation of collateral, typically aim to change incentives for borrowers. In contrast, pre-modern credit market interventions, such as usury laws, often targeted the behavior of lenders. We describe and model a norm which, though widespread, has escaped scholarly attention: a stipulation that accumulated interest cannot exceed the original principal, irrespective of how much time has elapsed. We interpret this rule, which is found in Hindu, Roman, and Chinese legal traditions, as giving lenders the incentive to find more capable borrowers, who will be able to repay early, thereby improving the allocation of capital. We document the consistency between our explanation and the rationale offered by policy-makers.

Keywords: Rural Credit Markets; Information Acquisition; Predatory Lending (search for similar items in EconPapers)
JEL-codes: C7 D8 K1 N2 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007-01
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Published in Economic Development and Cultural Change, July 2010, v. 58, iss. 4, pp. 775-803.

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Journal Article: Only Twice as Much: A Rule for Regulating Lenders (2010)
Working Paper: Only Twice As Much: A Rule for Regulating Lenders (2007)
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