Transportation Costs or Asymmetric Information. To recap, the bank in our study does not seem to practice uniform loan pricing. On the contrary, borrowers located closer to the lender and farther away from competitors incur higher loan rates. We also observe that an increase in the distance between borrower and lender decreases the loan rate by a similar amount than a decrease in the distance between borrower and the closest competitors. The transportation costs we impute are reasonable. However, as argued in section 2, distance may also affect the quantity and quality of information that banks and borrowers have about each other. To disentangle whether the effects of distance on the loan rate hinge on transportation costs or informational asymmetries, we start by interacting our two distance measures with the bank-firm relationship variables in Model VI in Table 7. The results are very interesting. The distance coefficients now capture the impact of distance for “transactional borrowers” (Main Bank = 0 and Duration of Relationship = 0). The restricted coefficients from this regression (which equal -/+ 14.2***) suggest that (according to a linear transportation model) a transactional borrower in our sample expects to visit his branch two-and-a-half times per year as a result of a new BEF 300,000 (USD 7,500) loan – one time more than the median borrower in Model V. Again, we would argue that the number of imputed visits is quite reasonable. Main Bank – “relationship” customers, on the other hand, seem shielded from discriminatory loan pricing. Indeed, we cannot reject the joint equality to zero of the sum of the coefficients on the distance measures and the respective interaction terms with the Main Bank variable (F = 0.156). Remember that a main bank borrower buys at least two products from the same bank and has a turnover on the current account at that same bank of at least BEF 100,000 (USD 2,500) per month. Hence, the lender probably knows its main bank borrowers better than it knows its other borrowers. At the same time, the main bank borrowers themselves may be less informed about alternative banks, their products, and prices. How then to interpret our results? The uninformed (transactional) lender in Xxxxxxxx and Xxxxxxx (2003) charges a higher loan rate to remote borrowers in order to compensate for the adverse selection problem, which intensifies in the vicinity of an informed (relationship) lender. The informed lender accordingly extracts a higher loan rate from closer borrowers. However, our re...
