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Moral Hazard with Rating Agency: An Incentive Contracting Approach

  • Bappaditya Mukhopadhyay

    ()

    (Management Development Institute)

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    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.

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    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 5 (2004)
    Issue (Month): 2 (November)
    Pages: 313-333

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    Handle: RePEc:cuf:journl:y:2004:v:5:i:2:p:313-333
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    1. 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.
    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. Anette Boom, . "A Monopolistic Credit Rating Agency," Papers 011, Departmental Working Papers.
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