Do banks price discriminate spatially? Evidence from small business lending in local credit markets

In this paper we explore the effects of bank–borrower physical proximity on price and non-price aspects
of small business lending in local credit markets. Along the price dimension, our analysis reveals that
interest rates increase with bank–borrower distance and decrease with the distance between borrower
and other competing banks. Along the quantity dimension, we observe that more distant borrowers
are more likely to experience binding credit limits. We also show that the quantity effects of bank–borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing
based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.