USURY LEGISLATION AND MARKET STRUCTURE: REPLY

Abstract

lower rate ceilings will reduce interest charges, expand supply, curtail excess profits, and thereby enhance the general welfare. In my view this is not the case. The model may be appropriate for electricity, gas, and other conventional commodities, but it is not appropriate for loans. Regulation is not an adequate substitute for vigorous competition in this market because monopoly power can be expressed in terms of rationing and rejections as well as in terms of price. How, then, can the reader decide between the two models? With respect to inherent plausibility, the reader is asked to suspend judgment momentarily. With respect to empirical evidence, I must concede that the regression estimates presented in the paper under discussion could be construed to fit either theoretical scheme. This is because the empirical focus of the paper rests on credit supplies, and the nonlinear supply implications of the two models are quite similar. Still, the implications of the models differ substantially with respect to other variables. And since the behavior of many of these other variables has been explored elsewhere, the implications of the models may be held up against this observed behavior for a brief comparative test of accuracy. In every instance mentioned below Brucker's model fails the test while mine passes. First, and perhaps most obviously, Brucker's model predicts an absence of rejections and rationing above price Pc in his Figure 1, since above Pc demand falls short of potential supply, which is depicted by the MC curve. This implication may be tested simply by observing whether or not rejections are common in those states with above average rate ceilings. As Brucker notes, the median state's rate ceiling corresponds to the point of maximum supply. Thus if his theory is correct, this median approximates Pc and we should then observe an absence of rejected demand in the states with the highest ceilings. However, as suggested in another paper appearing in this Journal [4], this is not the case. State-by-state data from three large multistate finance companies reveal an average rejection rate of 32 percent in the above-median states. And the lowest rejection rate of all states was 21.5 percent in Hawaii, which at the time these data were gathered had a rather high average rate ceiling of 40 percent APR.