Relationship Finance, Informational Rent, and Observational Indistinguishability from Short-Termism

Abstract:     
Relationship intermediaries specialise in alleviating information asymmetry, but the literature remains vague on precisely what information they acquire and how they put such information to use. This paper characterises explicitly a particular class of signal extraction and studies the optimal funding policy that maximises the associated informational rents. Because it strikes the optimal trade-off between present and future periods, this funding policy cannot be labelled short-termist. Yet if the relationship intermediary's ROC curve is kinked, this intertemporally optimal funding policy may nevertheless appear indistinguishable from short-termism to the uninformed outside observer.

Keywords: Relationship intermediation, informational rent, quasi-option value, short-termism, signal detection, Receiver Operating Characteristics (ROC) curve

JEL Classifications: G21, G24, L14

Working Paper Series