Innovations in financial services, relationships, and risk sharing

Relationships between intermediaries and their customers have become increa singly important in recent years. This paper argues that the need for costl y ex ante information acquisition and analysis is a major barrier to the pa rticipation of investors and firms in sophisticated markets. Long-term rela tionships between intermediaries and their customers, in which intermediari es provide implicit insurance to customers, can be an effective substitute for costly ex ante investigation. Ln this way, intermediaries allow firms a nd investors to reap the benefits of financial markets. Relationships are e asiest to sustain when the ongoing benefits to both parties are high. As a result, competition may lower the benefits that can be obtained from relati onships.