The Causal Impact of Distance on Bank Lending

Abstract

We exploit exogenous shocks to the distance between corporate borrowers and banks from infrastructure improvements to analyze the causal impact of distance on lending. Reductions in travel time impact both new and existing borrowing relationships. Lower distance increases the likelihood of initiating a new banking relationship, consistent with closer distance creating an economic surplus from lower transaction costs. In existing lending relationships banks capture a fraction of this surplus by increasing interest rates, in particular if banks have higher market power. Larger infrastructure projects are associated with stronger declines in distance and larger treatment effects.

Keywords: bank credit, lending relationship, spatial price discrimination

JEL Classification: G21, L11, L14