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Keywords:

  • G14;
  • G28;
  • K23;
  • L51
  • credit;
  • usury law;
  • interest rate caps;
  • moral hazard

Usury law is often criticized by economists for curtailing lending and thus creating deadweight costs. This paper shows that if moral hazard leads to credit rationing, a just-binding usury law creates a deadweight gain. This property also holds in most market-clearing equilibria. Independent of social insurance benefits, or curbing present-biased preferences, interest rate caps have merit.