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Two-sided Certification: The market for Rating Agencies

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  • Fasten, Erik R.
  • Hofmann, Dirk
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    Abstract

    Certifiers contribute to the sound functioning of markets by reducing a symmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

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    File URL: http://epub.ub.uni-muenchen.de/13216/1/338.pdf
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    Bibliographic Info

    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 338.

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    Date of creation: Oct 2010
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    Handle: RePEc:trf:wpaper:338

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    Related research

    Keywords: Certification; Rating Agencies; Asymmetric Information; Financial Markets;

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