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An experimental investigation of rating-market regulation

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  • Keser, Claudia
  • Özgümüs, Asri
  • Peterlé, Emmanuel
  • Schmidt, Martin

Abstract

We introduce a simple game-theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit-rating agency. It involves up-front payments of issuer-fees and direct publication of requested ratings. Due to pecuniary injuries for untruthful ratings, the credit-rating agency should always report truthfully in the subgame perfect equilibrium. Knowing this, the issuer should never request a rating. Conducting laboratory experiments, we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution: issuers frequently do request ratings, which is often reciprocated with untruthful good ratings.

Suggested Citation

  • Keser, Claudia & Özgümüs, Asri & Peterlé, Emmanuel & Schmidt, Martin, 2017. "An experimental investigation of rating-market regulation," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 78-86.
  • Handle: RePEc:eee:jeborg:v:144:y:2017:i:c:p:78-86
    DOI: 10.1016/j.jebo.2017.09.022
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    Keywords

    Game theory; Laboratory experiments; Rating agencies; Regulation;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G0 - Financial Economics - - General

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