Switching Costs in Local Credit Markets

41 Pages Posted: 28 Oct 2010

See all articles by Guglielmo Barone

Guglielmo Barone

University of Padova - Department of Economics and Management

Roberto Felici

Bank of Italy

Marcello Pagnini

Bank of Italy

Date Written: June 30, 2010

Abstract

Switching costs are a key determinant of market performance. This paper tests their existence in the corporate loan market in which they are likely to play a central role because of the complexity of contracts and informational problems. Using very detailed data at bank-firm level on four Italian local credit markets we empirically show that firms tend to iterate their choice of the main bank over time. This inertia is not related to unobserved and time invariant preferences of firms across banks and can be attributed to the existence of switching costs. We also offer evidence that banks price discriminate between new and old borrowers by charging lower interest rates to the former in order to cover part of the switching costs. The discount is about 44 basis points, equal to 7 per cent of the average interest rate. These results prove robust to a number of other potential identification drawbacks.

Keywords: Switching Costs, Local Credit Markets, Price Discrimination, Lending Relationships

JEL Classification: L13, G21

Suggested Citation

Barone, Guglielmo and Felici, Roberto and Pagnini, Marcello, Switching Costs in Local Credit Markets (June 30, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 760, Available at SSRN: https://ssrn.com/abstract=1699233 or http://dx.doi.org/10.2139/ssrn.1699233

Guglielmo Barone (Contact Author)

University of Padova - Department of Economics and Management ( email )

Via del Santo 33
Padova, 35123
Italy

Roberto Felici

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Marcello Pagnini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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