Search Frictions in Credit Markets

Abstract

Using data on more than 3.5 million firm-bank relationships, I document new facts suggesting that search frictions are pervasive in credit markets. Motivated by this evidence, I develop a theory of firm-bank matching subject to search frictions. Firms undergo a costly search process to locate and match with the right banking partner, and upon matching, banks incur a cost to screen projects. The model predicts that a reduction in search frictions increases (i) credit flows between cities and (ii) the distance between a bank and its customers. I confirm these predictions by estimating my model on French data, using the staggered roll-out of broadband internet from 1998 to 2007 as an instrument for a reduction in search costs. Using the structurally estimated parameters, I find that broadband access reduced the cost of debt for small businesses by 4.9%.

Keywords: Search frictions, Broadband internet, Firm-bank matching, Credit

JEL Classification: L22, L23, D83