Borrowers Can (and Sometimes Do) Default on Their Loans When
journal article
The Periodical of Constabulary & Economic science
Published By: The University of Chicago Press
https://doi.org/10.1086/467383
https://www. jstor .org/stable/x.1086/467383
Interest‐rate restrictions are pervasive and important regulations. This commodity suggests that these restrictions served, in part, as a primitive means of social insurance. Lowering the rate of interest effectively transfers income to states of the world where individuals have a high marginal utility of income and are borrowers from states of the world where individuals have a low marginal utility of income and are lenders. The model predicts that interest‐charge per unit restrictions will be tighter when income inequality is high and impermanent and when growth rates are depression. Furthermore, loan supply must be somewhat inelastic. Data from U.S. states back up a connection between inequality, income shocks, and tighter usury laws. Usury laws were besides stricter in older, more than stable communities. The history of usury laws suggests that this social insurance mechanism is 1 reason usury laws exist and persist, but this history besides suggests that usury laws have played many roles across time and that no one theory can possibly capture all of these roles.
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Source: https://www.jstor.org/stable/10.1086/467383