Working Paper: NBER ID: w11734
Authors: Howard Bodenhorn
Abstract: Few pieces of economic regulation are ubiquitous as usury limits. Similarly, few economic principles are as widely accepted as the belief that interference with freely contracted prices leads to market distortions, and many studies of financial markets find that usury limits negatively affect credit availability. This study shows that when no regulatory authority monitors and stands ready to punish violators of the usury limit when intermediaries and borrowers form long-term relationships, banks and borrowers regularly contract for interest rates in excess of the usury ceiling. Time series analysis reveals limited effects on credit availability when market rates exceed the usury ceiling. Cross-sectional analysis of individual loan contracts also shows that the positive effect of a long-term relationship offsets the negative effect of the usury limit on credit availability.
Keywords: No keywords provided
JEL Codes: N2; N8; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market rates exceed usury ceiling (E43) | Banks do not significantly reduce number of loans (G21) |
| Market rates exceed usury ceiling (E43) | Banks do not significantly reduce aggregate lending (G21) |
| Market rates exceed usury ceiling (E43) | Average loan sizes increase (G51) |
| Market rates exceed usury ceiling (E43) | Average maturities decline (E43) |
| Long-term relationships between banks and borrowers (G21) | More favorable loan terms (G51) |
| Long-term relationships between banks and borrowers (G21) | Offset negative impacts of usury limits on credit availability (E51) |
| Borrowers are less likely to sue for usury (K35) | Value of maintaining relationships (L14) |
| Expected benefits outweigh costs (H43) | Banks selectively violate usury laws (G21) |