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Innovations in Financial Services, Relationships, and Risk Sharing

Author

Listed:
  • 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.

Suggested Citation

  • Franklin Allen & Douglas Gale, 1999. "Innovations in Financial Services, Relationships, and Risk Sharing," Management Science, INFORMS, vol. 45(9), pages 1239-1253, September.
    • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:9:p:1239-1253
    DOI: 10.1287/mnsc.45.9.1239
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    References listed on IDEAS

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