The Causal Impact of Distance on Bank Lending

Abstract

We exploit exogenous shocks to the distance between corporate borrowers and banks to analyze the role of distance in commercial bank lending. We find that a reduction in travel time due to improved infrastructure increases the likelihood of initiating a new borrowing relationship, evidence that lower distance creates a surplus from lower transaction costs. In existing lending relationships, however, banks capture a fraction of this surplus by increasing interest rates. Larger changes in distance are associated with stronger effects and banks with higher market power capture a larger fraction of the surplus.

Keywords: bank credit, lending relationship, spatial price discrimination

JEL Classification: G21, L11, L14