Credit rationing and the welfare gain from Usury laws

Paper number: 97/15

Paper date: 30 October 1997

Year: 1997

Paper Category: Discussion Paper

Authors

Giuseppe Coco
University of Exeter

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.

JEL Classification Nos: D28; G28; G14
Keywords: Collateral; rationing; usury laws

Corresponding Author: Giuseppe Coco, Department of Economics, University of Exeter, Amory Building, Rennes Drive, Exeter, EX4 4RJ, UK, tel: (44) 1392 263226, fax: (44) 1392 263242, email: G.Coco@exeter.ac.uk