Premature repayment of fixed interest mortgage loans without compensation, a case of misguided consumer protection in the EU

Consumer protection shifts risks from consumers to businesses. This raises marginal costs and equilibrium prices. It is justified when markets are not strong enough to allocate contractual risks or accident risks efficiently, especially in cases of severe asymmetric information between suppliers and consumers. Consumer protection can then increase the consumer’s expected welfare from a contract. We test these considerations in a theoretical and empirical study on consumers' right to early repayment of mortgage loans without damage compensation to the creditor in the European Union. We show in a formal model that such a right can lead to an impairment of consumer welfare, compared with the traditional rule of expectation damages for breach of contract. This applies if the consumer is risk averse and repays a loan with a high interest rate in a low interest period to take up a new loan for the same project at lower interests. From a theoretical point of view, this right has no solid economic underpinning, if it is not restricted to cases of personal hardship of the consumer and serves an insurance purpose. We present empirical evidence supporting this argument. In a panel study on monthly mortgage interest rates of 23 EU Member States between 2005 and 2017 we show how interest rate spreads change with the level of consumer protection.

Crime and punishment in times of pandemics

How should we think about crime deterrence in times of pandemics? The economic analysis of crime tells us that potential offenders will compare the costs and the benefits from crime and from innocence and then choose whichever option is more profitable. We must therefore ask ourselves how this comparison is affected by the outbreak of a pandemic and the policy changes which may accompany it, such as governmental restrictions, social distancing, and responses to economic crises. Using insights from law and economics, this paper investigates how the various components in the cost-benefit analysis of crime might change during a pandemic, focusing on Covid-19 as a test case. Building on classical theoretical models, existing empirical evidence, and behavioral aspects, the analysis reveals that there are many potentially countervailing effects on crime deterrence. The paper thus highlights the need to carefully consider which aspects are applicable given the circumstances of the pandemic, as whether crime deterrence will increase or decrease should depend on the strength of the effects at play.