Illegal finance, interest rates and bank lending: the missing supply side of usury
by Lucia Dalla Pellegrina
Global Business and Economics Review (GBER), Vol. 10, No. 3, 2008

Abstract: This paper aims at identifying a causal relationship going from bank interest rates and credit rationing to usury. We manage the endogeneity issues by exploiting the variables that are related to bankruptcy proceedings as exogenous factors that affect bank variables, but not the other nonmeasurable determinants of usury. The estimates carried out in Italian provinces during the period of 1999–2002 provide evidence that a higher bank credit availability reduces illegal lending, while interest rates respond ambiguously. We explain these results with the presence of contrasting forces that drive usury demand and supply. We test the robustness of our estimates using controls that capture economic and financial conditions, social standards, government intervation, the severity of punishments and the presence of organised crime.

Online publication date: Wed, 20-Aug-2008

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