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Only Twice As Much: A Rule for Regulating Lenders

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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.

Suggested Citation

  • Mandar Oak & Anand Swamy, 2007. "Only Twice As Much: A Rule for Regulating Lenders," Department of Economics Working Papers 2007-06, Department of Economics, Williams College.
    • Handle: RePEc:wil:wileco:2007-06
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    More about this item

    Keywords

    Rural Credit Markets; Information Acquisition; Predatory Lending;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K1 - Law and Economics - - Basic Areas of Law
    • N2 - Economic History - - Financial Markets and Institutions

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