A Re-Evaluation and Test of the Distributive Effects of Usury Ceilings and the Role of the Customer Relationship in Usury Theory
Whitaker, Andrew L.
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https://hdl.handle.net/2142/72414
Description
Title
A Re-Evaluation and Test of the Distributive Effects of Usury Ceilings and the Role of the Customer Relationship in Usury Theory
Author(s)
Whitaker, Andrew L.
Issue Date
1988
Doctoral Committee Chair(s)
Sprenkle, Case M.,
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Business Administration, Banking
Abstract
The general purpose of this study is to define and correct three serious flaws in the existing literature concerning usury ceilings. These flaws are: (1) a serious misapplication of the role of the customer relationship as posited by Hodgman and Kane and Malkiel, (2) an oversimplification of the distributive effects of usury ceilings, and (3) a general lack of sound empirical testing of conclusions in the theory surrounding the use of contract terms to circumvent ceilings.
Despite wide criticism of the customer relationship models cited above, the literature has used them to draw the conclusion that borrowers with the strongest customer relationship will be given preference during periods of credit rationing due to ceilings. However, the role of the customer-relationship has not been adequately modeled and has neglected the crucial role of elasticity in the ordering decision. Thus, it is shown that in a competitive model where pressure among banks requires full compensation for banking relationships, neither deposits nor intertemporal loan demand can justify the preferential treatment claimed. And indeed, it is found that the optimal ordering of customers may be opposite of what is generally assumed.
In addition, the literature has developed a simple model of the distributive effects of ceilings. However, this model neglects the possible effects of administrative costs and default risk in reaching the conclusion that loan volume will fall in constrained categories. This study demonstrates, in a model incorporating administrative costs and default risk, that the impact of a ceiling is more complicated and may either decrease or increase the volume of lending vis-a-vis the preceiling level.
Finally, existing empirical work in the usury area is both limited and often of questionable worth. Thus, in addition to providing models to empirically test the above conclusions, this study constructs models for more comprehensive and sound empirical testing of banks' use of contract terms to circumvent ceilings than has previously existed in the literature.
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