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Interest rate restrictions in a natural experiment: loan allocation and the change in the usury laws in 1714
Voth, Joachim; Temin, Peter
Universitat Pompeu Fabra. Departament d'Economia i Empresa
This article studies the effects of interest rate restrictions on loan allocation. The British governmenttightened the usury laws in 1714, reducing the maximum permissible interest rate from 6% to5%. A sample of individual loan transactions reveals that average loan size and minimum loan sizeincreased strongly, while access to credit worsened for those with little social capital. Collateralisedcredits, which had accounted for a declining share of total lending, returned to their former role ofprominence. Our results suggest that the usury laws distorted credit markets significantly; we findno evidence that they offered a form of Pareto-improving social insurance.
Economic and Business History
economic development
financial repression
usury laws
credit rationing
natural experiments
lending decisions
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