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

Author

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  • 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 2015-48, Peruvian Economic Association.
  • Handle: RePEc:apc:wpaper:2015-048
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    References listed on IDEAS

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    1. Antoine Faure‐Grimaud & Eloïc Peyrache & Lucía Quesada, 2009. "The ownership of ratings," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 234-257, June.
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    Cited by:

    1. 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.
    2. Julien Benistant & Fabio Galeotti & Marie Claire Villeval, 2021. "The Distinct Impact of Information and Incentives on Cheating," Working Papers halshs-03110295, HAL.
    3. 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).

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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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