Persuasion in Relationship Finance

68 Pages Posted: 11 Oct 2017 Last revised: 4 Sep 2019

See all articles by Ehsan Azarmsa

Ehsan Azarmsa

University of Chicago, Booth School of Business

Lin William Cong

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2019


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 competitive outsider investors as persuasion games with heterogeneous receivers and contingent transfers. Entrepreneurs' endogenous experimentation reduces insider investors' information monopoly, but holds up initial relationship investments. 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 outsiders. Our findings do not rely on full commitment to information disclosure, and remain robust under restricted information design and continuum action space.

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

JEL Classification: D47, D82, D83, G14, G23, G28

Suggested Citation

Azarmsa, Ehsan and Cong, Lin, Persuasion in Relationship Finance (June 1, 2019). Becker Friedman Institute for Research in Economics Working Paper No. 2017-16. Available at SSRN: or

Ehsan Azarmsa (Contact Author)

University of Chicago, Booth School of Business ( email )

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

Lin Cong

Cornell University ( email )

Ithaca, NY 14853
United States


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