Persuasion in Relationship Finance

60 Pages Posted: 15 Aug 2017 Last revised: 23 Oct 2018

See all articles by Ehsan Azarmsa

Ehsan Azarmsa

University of Chicago, Booth School of Business

Lin William Cong

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 7, 2018

Abstract

Relationship finance as seen in bank lending and venture capital features incumbent financiers' observing interim information after initial investment but before continuation decision. We model the entrepreneurs' endogenous information production and subsequent issuance of securities to both the incumbent insider and new outsider financiers as persuasion games with heterogeneous receivers and contingent transfers. Entrepreneurs' endogenous experimentation reduces insider investors' information monopoly, but holds up initial relationship investment. Insider financiers' own information production and interim competition from outsiders can mitigate the hold-up, and jointly explain the empirical non-monotone patterns linking competition and relational lending. Optimal relationship contracts restore first-best outcomes using convertible securities for insiders and residual claims for competitive outsiders. Our findings are robust under continuum action space and partial commitment to information design.

Keywords: Information Design, Security Design, Bayesian Persuasion, Relationship Lending, Moral Hazard, Hold-up, Experimentation, Venture Capital, Contracting

JEL Classification: D47, D82, D83, G21, G24, G32

Suggested Citation

Azarmsa, Ehsan and Cong, Lin, Persuasion in Relationship Finance (October 7, 2018). Available at SSRN: https://ssrn.com/abstract=3016102 or http://dx.doi.org/10.2139/ssrn.3016102

Ehsan Azarmsa

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
3122567183 (Phone)

Lin Cong (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
544
rank
37,222
Abstract Views
2,256
PlumX Metrics