Abstract
After initial investments, relationship financiers typically observe interim about projects before continuing financing them. Meanwhile, entrepreneurs produce endogenously and issue securities to incumbent insider and competitive outsider investors. In such persuasion games with differentially informed receivers and contingent transfers, entrepreneurs' endogenous experimentation reduces insiders' monopoly but impedes relationship formation through an information production hold-up. Insiders' production and interim competition mitigate this hold-up, and jointly explain empirical links between competition and relationship lending. Optimal contracts restore first-best outcomes using convertible securities for insiders and residuals for outsiders. Our findings are robust under various extensions and alternative specifications.
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