TY  - JOUR
AU  - Glaeser,Edward L.
AU  - Scheinkman,Jose A.
TI  - Neither a Borrower nor a Lender Be: An Economic Analysis of Interest    Restrictions and Usury Laws
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4954
PY  - 1994
Y2  - December 1994
UR  - http://www.nber.org/papers/w4954
L1  - http://www.nber.org/papers/w4954.pdf
N1  - Author contact info:
Edward L. Glaeser
Department of Economics
315A Littauer Center
Harvard University
Cambridge, MA 02138
Tel: 617/495-0575
Fax: 617/495-7730
E-Mail: eglaeser@harvard.edu

Jose A. Scheinkman
Department of Economics
Princeton University
Princeton, NJ  08544-1021
Tel: 609/258-4020
Fax: 609/258-0771
E-Mail: joses@princeton.edu
AB  - 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).
ER  -