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Fees, Reputation, and Information Production in the Credit Rating Industry

Author

Listed:
  • Jacopo Bizzotto
  • Adrien Vigier

Abstract

We compare a credit rating agency's incentives to acquire costly information when it is only paid for giving favorable ratings to the corresponding incentives when the agency is paid up-front, i.e., irrespective of the ratings assigned. We show that, in the presence of moral hazard, contingent fees provide stronger dynamic incentives to acquire information than up-front fees and may induce higher social welfare. When the fee structure is chosen by the agency, contingent fees arise as an equilibrium outcome, in line with the way the market for credit rating actually works.

Suggested Citation

  • Jacopo Bizzotto & Adrien Vigier, 2021. "Fees, Reputation, and Information Production in the Credit Rating Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 13(2), pages 1-34, May.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:2:p:1-34
    DOI: 10.1257/mic.20180170
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    Cited by:

    1. Farkas, Miklós, 2021. "Competition, communication and rating bias," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 637-656.
    2. Dingzu Zhang & Lijuan Pan & Luqi Liu & Huixiang Zeng, 2023. "Impact of executive pay gap on environmental, social, and governance disclosure in China: Is there a strategic choice?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(5), pages 2574-2589, September.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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