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Credible Ratings

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Author Info

  • Ettore Damiano
  • Hao Li
  • Wing Suen

Abstract

This paper considers a model of a rating agency with multiple clients. ach client has a separate market (end-user of the rating); the only connection among them is that the underlying qualities of the clients are correlated. In the benchmark case of individual rating, the market for each client does not know the ratings for other clients. In centralized rating, the agency rates all clients together and shares the rating information among all markets. In decentralized rating, the ratings are again shared among all markets, but each client is rated by a self-interested rater of the agency with no access to the quality information of other clients. Both centralized rating and decentralized rating weakly dominate individual rating for the agency. When the underlying qualities are weakly correlated, centralized rating can dominate decentralized rating, but the reverse holds when the qualities are strongly correlated.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-219.

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Length: 40 pages
Date of creation: 11 Jan 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-219

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Cited by:
  1. Ehlers, Tim & Schwager, Robert, 2012. "Honest Grading, Grade Inflation and Reputation," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62051, Verein für Socialpolitik / German Economic Association.
  2. Ehlers, Tim & Schwager, Robert, 2012. "Honest grading, grade inflation and reputation," Center for European, Governance and Economic Development Research Discussion Papers 143, University of Goettingen, Department of Economics.
  3. Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207 National Bureau of Economic Research, Inc.
  4. Vasiliki Skreta & Laura Veldkamp, 2008. "Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation," Working Papers 08-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Mariano, Beatriz, 2012. "Market power and reputational concerns in the ratings industry," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1616-1626.

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