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Seller - paid Ratings

Author

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  • Sergei Kovbasyuk

    (EIEF)

Abstract

We study the interaction between the seller of a product, the buyers who are uncertain about the product quality and a rating agency who observes the quality and send signals about it. Assuming the seller-pays model of rating agency, we analyze the cases in which payment to the rater is publicly disclosed and fixed, publicly disclosed and rating-contingent, private and rating-contingent. First, we characterize all possible equilibrium partitions of the underlying quality range into ratings in these three cases. We then characterize the seller's optimal ratings in the three cases. Finally, we perform welfare analysis and discuss regulation.

Suggested Citation

  • Sergei Kovbasyuk, 2013. "Seller - paid Ratings," EIEF Working Papers Series 1330, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2013.
  • Handle: RePEc:eie:wpaper:1330
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    File URL: http://www.eief.it/files/2014/04/wp-30-seller-paid-ratings.pdf
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    References listed on IDEAS

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    1. Vijay Krishna & John Morgan, 2008. "Contracting for information under imperfect commitment," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 905-925.
    2. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
    3. repec:hoo:wpaper:e-89-7 is not listed on IDEAS
    4. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap Talk with Two Audiences," American Economic Review, American Economic Association, vol. 79(5), pages 1214-1223, December.
    5. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-1098, July.
    6. Roman Inderst & Marco Ottaviani, 2012. "Competition through Commissions and Kickbacks," American Economic Review, American Economic Association, vol. 102(2), pages 780-809, April.
    7. Opp, Christian C. & Opp, Marcus M. & Harris, Milton, 2013. "Rating agencies in the face of regulation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 46-61.
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    Cited by:

    1. Marta Allegra Ronchetti, 2015. "Credit Rating Agency, Preliminary Ratings and Contact Disclosure," Discussion Papers 2015/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    2. repec:eee:jetheo:v:173:y:2018:i:c:p:289-319 is not listed on IDEAS
    3. Marta Allegra Ronchetti, 2018. "Preliminary credit ratings and contact disclosure," Discussion Papers 2018/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    4. Goel, Anand M. & Thakor, Anjan V., 2015. "Information reliability and welfare: A theory of coarse credit ratings," Journal of Financial Economics, Elsevier, vol. 115(3), pages 541-557.

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