Estimating Informational Frictions in Sticky Relationships

This paper introduces a novel empirical approach to estimate the effects of an informational friction limiting the reallocation of credit after a shock to banks. Because lenders rely on private information when deciding which relationship to end, borrowers looking for a new lender are adversely selected. I show how to identify private information separately from information common to all lenders, but unobservable to the econometrician, by using bank shocks within a discrete-choice model of relationships. Applying this approach to the U.S. corporate loan market during the recent crisis, this informational friction can explain 10% of the decrease in lending.