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Innovations in Financial Services, Relationships, and Risk Sharing

  • Franklin Allen

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

  • Douglas Gale

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

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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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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  1. Gale, Douglas, 1992. "Standard Securities," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 731-55, October.
  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. 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.
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