Distance, Borrower Information, and Experience Sample Clauses

Distance, Borrower Information, and Experience. Xxxxxx observation suggests that borrowers do not always frequent the closest bank, as most spatial models presume they should. Incomplete borrower information and other bank product characteristics may cause borrowers to visit more distant banks. First, borrowers may not be fully informed about the precise location of all competing banks and the availability and conditions of the loans offered there. Xxxxxxxx and Xxxxxxx (1984) and Xxxxxx and Xxxxxxxx (1995) model such location cum informational differentiation. In Xxxxxxxx and Xxxxxxx (1984), consumers buy a product from a particular seller upon becoming informed of its location through advertising. The advertising itself is not localized. The sales price in their model exceeds the full information price, by the magnitude of the transportation cost, as informational differentiation lowers the elasticity of demand. In addition, consumers in their model, as they are unaware of all sellers, do not necessarily patronize the closest one. Xxxxxx and Xxxxxxxx (1995) model the advertising of lower price offers. In the absence of advertising, customers are only informed about “local” prices. Producers will advertise lower prices to attract customers from more distant locations. Hence, more distant informed customers will be observed to receive lower prices. Second, location is just one characteristic of a bank’s product that is important for its customers. For example, Elliehausen and Xxxxxx (1990) document that small and medium-sized firms in the U.S. are also influenced by other characteristics of the branches (convenience and hours of operation), banks (reputation, quality and reliability), and relationships (personal or long-term) when choosing a particular bank.9 Hence, borrowers may not visit the closest bank branch when another bank’s loan product exhibits other, more preferred, characteristics.10 And, once borrowers have experienced a good match and have observed the high quality of the services provided by their current bank, they will switch to another bank only when offered a considerably lower price (Tirole (1988), p. 294). To conclude, most theoretical models imply a negative (positive) correspondence between the borrower-lender (competing bank) distance and the loan rate, caused by either transportation costs (for either the borrower or the lender) or asymmetric information. Information availability, experience, and other product characteristics may xxxxx the strength of the distance – loan rate rel...