Innovations in financial services, relationships, and risk sharing

Innovations in financial services, relationships, and risk sharing

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Article ID: iaor20002850
Country: United States
Volume: 45
Issue: 9
Start Page Number: 1239
End Page Number: 1253
Publication Date: Sep 1999
Journal: Management Science
Authors: ,
Keywords: risk
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 the 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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