Neither a borrower nor a lender be: An economic analysis of interest restrictions and usury laws

Interest-rate restrictions are pervasive and important regulations. This article suggests that these restrictions served, in part, as a primitive means of social insurance. Lowering the rate of interest effectively transfers income to states crf 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-rate restrictions will be tighter when income inequality is high and impermanent and when growth rates are low. Furthermore, loan supply must be somewhat inelastic. Data from U.S., states support a connection between inequality, income shocks, and righter usury laws. Usury laws were also stricter in older, more stable communities. The history of usury laws suggests that this social insurance mechanism is one reason usury laws exist and persist, but this history also suggests that usury laws have played many roles across time and that no one theory can possibly capture all of these roles.