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An experimental investigation of rating-market regulation

Author

Listed:
  • Claudia Keser

    (University of Göttingen)

  • Asri Özgümüs

    (University of Göttingen)

  • Emmanuel Peterle

    () (Université Bourgogne Franche-Comté, CRESE)

  • Martin Schmidt

    (Karlsruhe Institute of Technology (KIT))

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

  • Claudia Keser & Asri Özgümüs & Emmanuel Peterle & Martin Schmidt, 2017. "An experimental investigation of rating-market regulation," Working Papers 2017-07, CRESE.
  • Handle: RePEc:crb:wpaper:2017-07
    as

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    File URL: http://crese.univ-fcomte.fr/WP-2017-07.pdf
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    References listed on IDEAS

    as
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    More about this item

    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
    • G01 - Financial Economics - - General - - - Financial Crises

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