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Does competition affect truth-telling? An experiment with rating agencies

Author

Listed:
  • Jean Paul Rabanal

    (Ball State University)

  • Olga A. Rabanal

    (Ball State University)

Abstract

We study the effect of competition on the conflicts of interest in an issuer-pay model. Our analysis complements the theoretical work of Bolton, Freixas and Shapiro (2012) by introducing an experimental approach that examines the effect of market structure –monopoly and competition– on the incidence of misreporting by rating agencies. In our game, agencies receive a signal regarding the type of asset that the seller holds. The seller does not know the asset type and therefore, asks the rating agency for a report which is either blue (good) or red (bad). The asset, along with the report (if any), is then presented to the buyer for purchase. We find that in the monopoly environment the likelihood of misreporting is almost three times as high as in the more competitive market.

Suggested Citation

  • Jean Paul Rabanal & Olga A. Rabanal, 2015. "Does competition affect truth-telling? An experiment with rating agencies," Working Papers 48, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:2015-048
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    References listed on IDEAS

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    Cited by:

    1. Kling, Luisa & König-Kersting, Christian & Trautmann, Stefan T., 2023. "Investment preferences and risk perception: Financial agents versus clients," Journal of Banking & Finance, Elsevier, vol. 154(C).
    2. Benistant, Julien & Galeotti, Fabio & Villeval, Marie Claire, 2021. "The Distinct Impact of Information and Incentives on Cheating," IZA Discussion Papers 14014, Institute of Labor Economics (IZA).
    3. Balmus, Tatiana & Huber, Juergen & Ploner, Matteo, 2020. "More competition in delegated portfolio management: A win-win situation? An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 777-800.
    4. Vu, Huong & Alsakka, Rasha & ap Gwilym, Owain, 2022. "Does competition improve sovereign credit rating quality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    5. Pertaia, Giorgi & Prokhorov, Artem & Uryasev, Stan, 2022. "A new approach to credit ratings," Journal of Banking & Finance, Elsevier, vol. 140(C).
    6. van Breemen, Vivian M. & Fabozzi, Frank J. & Vink, Dennis, 2022. "Intensified competition and the impact on credit ratings in the RMBS market," Working Paper Series 2691, European Central Bank.
    7. Goergen, Marc & Gounopoulos, Dimitrios & Koutroumpis, Panagiotis, 2021. "Do multiple credit ratings reduce money left on the table? Evidence from U.S. IPOs," Journal of Corporate Finance, Elsevier, vol. 67(C).
    8. Benistant, Julien & Galeotti, Fabio & Villeval, Marie Claire, 2022. "Competition, information, and the erosion of morals," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 148-163.
    9. Sheth, Jesal D., 2021. "Disclosure of information under competition: An experimental study," Games and Economic Behavior, Elsevier, vol. 129(C), pages 158-180.
    10. Angerer, Martin & Herrmann-Romero, Matthias & Szymczak, Wiebke, 2022. "Losing funds or losing face? Reputation and accountability in the credit rating industry," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    11. Agoraki, Maria-Eleni & Gounopoulos, Dimitrios & Kouretas, Georgios P., 2021. "Market expectations and the impact of credit rating on the IPOs of U.S. banks," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 587-610.

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    More about this item

    Keywords

    Credit rating agencies; Conflicts of interest; Market structure; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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