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The ownership of ratings

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  • Antoine Faure-Grimaud
  • Eloïc Peyrache
  • Lucía Quesada

Abstract

We identify the optimal contract between a rating agency and a firm and the circumstances under which simple ownership contracts implement this optimal solution. We assume that the decision to obtain a rating is endogenous and the price of a rating is a strategic variable. Clients hiding their ratings can be an equilibrium only if they are ex ante uncertain of their quality and if the hiring decision is not observable. For some distribution functions, a competitive rating market is necessary for this result to obtain. In this context, competition between rating intermediaries will lead to less information in equilibrium. Copyright (c) 2009, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 40 (2009)
Issue (Month): 2 ()
Pages: 234-257

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Handle: RePEc:bla:randje:v:40:y:2009:i:2:p:234-257

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  1. Joseph Farrell, 1985. "Voluntary Disclosure: Robustness of the Unraveling Result, and Comments on Its Importance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 374, Massachusetts Institute of Technology (MIT), Department of Economics.
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