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Moral Hazard with Rating Agency: An Incentive Contracting Approach

Author

Listed:
  • Bappaditya Mukhopadhyay

    (Management Development Institute)

Abstract

Credit Rating agencies su?er from a possible moral hazard problem. This is caused due to the fact that the evaluation standards set by rating agencies are unobservable to outsiders. In this paper, we address the moral hazard problem with the rating agencies. We discuss the feasibility of possible incentive contracts that can ameliorate this problem. We ¡¥nd, that incentive payments to the rating agency based on expected returns on debt will eliminate the moral hazard problem.

Suggested Citation

  • Bappaditya Mukhopadhyay, 2004. "Moral Hazard with Rating Agency: An Incentive Contracting Approach," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 313-333, November.
    • Handle: RePEc:cuf:journl:y:2004:v:5:i:2:p:313-333
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    References listed on IDEAS

    as
    1. Anette Boom, "undated". "A Monopolistic Credit Rating Agency," Papers 011, Departmental Working Papers.
    2. Christoph Kuhner, 2001. "Financial Rating Agencies: Are They Credible? – Insights Into The Reporting Incentives Of Rating Agencies In Times Of Enhanced Systemic Risk," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 53(1), pages 2-26, January.
    3. Nayar, Nandkumar, 1993. "Asymmetric information, voluntary ratings and the Rating Agency of Malaysia," Pacific-Basin Finance Journal, Elsevier, vol. 1(4), pages 369-380, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Hartarska, Valentina M., 2006. "Rating in Microfinance: Cross-Country Evidence," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25506, International Association of Agricultural Economists.
    2. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics.
    3. Miloš Božovic & Branko Uroševic & Boško Živkovic, 2011. "Credit Rating Agencies and Moral Hazard," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 219-227, June.
    4. Valentina Hartarska, 2004. "Governance and Performance of Microfinance Institutions in Central And Eastern Europe and the Newly Independent States," William Davidson Institute Working Papers Series 2004-677, William Davidson Institute at the University of Michigan.

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    More about this item

    Keywords

    Credit rating; Information production; Moral hazard;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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