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The Quality of Credit Ratings. A Two-Sided Market Perspective

Author

Listed:
  • Jorge Ponce

    () (Toulouse School of Economics (Gremaq)
    Banco Central del Uruguay)

Abstract

This paper presents a formal model of a credit rating agency. I study the consequences of the transition from an “investor-pays” model to an “issuer-pays” model on the quality standard of credit ratings chosen by the agency. I find that such a transition is likely to generate a degradation of the quality standard, which may fall below the socially efficient level. I discuss empirical implications and several reform proposals to the business model of credit rating agencies.

Suggested Citation

  • Jorge Ponce, 2009. "The Quality of Credit Ratings. A Two-Sided Market Perspective," Documentos de trabajo 2009002, Banco Central del Uruguay, revised 24 Feb 2010.
  • Handle: RePEc:bku:doctra:2009002
    as

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    File URL: http://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/2.2009.pdf
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    References listed on IDEAS

    as
    1. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    2. Doh-Shin Jeon & Jean-Charles Rochet, 2010. "The Pricing of Academic Journals: A Two-Sided Market Perspective," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 222-255, May.
    3. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
    4. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    5. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics.
    6. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    7. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    8. Felton, Andrew & Reinhart, Carmen M. (ed.), 2009. "The First Global Financial Crisis of the 21st Century Part II: June–December, 2008," Vox eBooks, Centre for Economic Policy Research, number p199.
    9. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
    10. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
    11. Richard Johnson, 2003. "An examination of rating agencies' actions around the investment-grade boundary," Research Working Paper RWP 03-01, Federal Reserve Bank of Kansas City.
    12. Beaver, William H. & Shakespeare, Catherine & Soliman, Mark T., 2006. "Differential properties in the ratings of certified versus non-certified bond-rating agencies," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 303-334, December.
    13. Stolper, Anno, 2009. "Regulation of credit rating agencies," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1266-1273, July.
    14. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
    15. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Lannoo, Karel, 2010. "What reforms for the credit rating industry? A European perspective," ECMI Papers 3805, Centre for European Policy Studies.
    2. repec:eee:riibaf:v:44:y:2018:i:c:p:471-479 is not listed on IDEAS
    3. Donato Masciandaro, 2013. "Sovereign debt: financial market over-reliance on credit rating agencies," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 72, pages 50-62 Bank for International Settlements.
    4. Nestor Duch-Brown, 2017. "Quality discrimination in online multi-sided markets," JRC Working Papers on Digital Economy 2017-06, Joint Research Centre (Seville site).
    5. Luitel, Prabesh & Vanpée, Rosanne & De Moor, Lieven, 2016. "Pernicious effects: How the credit rating agencies disadvantage emerging markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 286-298.

    More about this item

    Keywords

    Credit Rating Agencies; Issuer-pays; Investor-pays; Two-sided Market; Endogenous Quality;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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