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Innovations in Financial Services, Relationships, and Risk Sharing

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Author Info

  • Franklin Allen

    (Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Douglas Gale

    (Economics Department, New York University, New York, New York 10003)

Abstract

Relationships between intermediaries and their customers have become increasingly important in recent years. This paper argues that the need for costly ex ante information acquisition and analysis is a major barrier to the participation of investors and firms in sophisticated markets. Long-term relationships between intermediaries and their customers, in which intermediaries provide implicit insurance to customers, can be an effective substitute for costly ex ante investigation. In this way, intermediaries allow firms and investors to reap the benefits of financial markets. Relationships are easiest to sustain when the ongoing benefits to both parties are high. As a result, competition may lower the benefits that can be obtained from relationships.

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File URL: http://dx.doi.org/10.1287/mnsc.45.9.1239
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 45 (1999)
Issue (Month): 9 (September)
Pages: 1239-1253

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Handle: RePEc:inm:ormnsc:v:45:y:1999:i:9:p:1239-1253

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Keywords: markets; intermediaries; unforeseen contingencies; misunderstandings; implicit contracts;

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References

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  1. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
  2. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  3. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  4. Gale, Douglas, 1992. "Standard Securities," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 731-55, October.
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Cited by:
  1. Elsas, Ralf & Krahnen, Jan Pieter, 2003. "Universal Banks and Relationships with Firms," CFS Working Paper Series 2003/20, Center for Financial Studies (CFS).
  2. Enrique L. Kawamura, 2000. "Investor´s Distrust and the Marketing of New Financial Assets," Working Papers 23, Universidad de San Andres, Departamento de Economia, revised Apr 2004.
  3. Di Noia, Carmine & Di Giorgio, Giorgio, 1999. "Should Banking Supervision and Monetary Policy Tasks Be Given to Different Agencies?," International Finance, Wiley Blackwell, vol. 2(3), pages 361-78, November.
  4. Hakenes, Hendrik, 2004. "Banks as delegated risk managers," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2399-2426, October.
  5. Weth, Mark A., 2002. "The pass-through from market interest rates to bank lending rates in Germany," Discussion Paper Series 1: Economic Studies 2002,11, Deutsche Bundesbank, Research Centre.
  6. Berg, Gunhild & Kirschenmann, Karolin, 2012. "Funding vs. real economy shock : the impact of the 2007-2009 crisis on small firms'credit availability," Policy Research Working Paper Series 6030, The World Bank.
  7. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance 0207009, EconWPA.

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