The Unintended Effects of Interest Rate Caps: Credit Reallocation to Safer Borrowers (opens in new tab)

Several states have recently capped consumer loan rates with the stated purpose of protecting borrowers. In a recent , we study how these interventions have played out in three states. In , we showed that rate caps lead riskier borrowers to face rationing in the credit market. One question that naturally arises is what lenders do with the credit they used to provide to high-risk borrowers before the caps were imposed. Lenders that lend exclusively to high-risk borrowers (at rates above the ca...