For centuries, rulers and lawmakers have imposed interest rate caps. These caps likely stem from the widely held belief that caps make loans cheaper for necessitous individuals. This belief persists today. But suppose the belief is wrong?

 

Economic theory predicts that interest rate caps make loans less available to subprime borrowers. My colleagues, Gregory Elliehausen and J. Brandon Bolen, and I recently tested this theory by studying credit bureau data for Illinois and a neighboring state, Missouri.

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