Believe only what you see: credit rating agencies, structured finance, and bonds
This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed.
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"The credit ratings game,"
Economics Working Papers
1221, Department of Economics and Business, Universitat Pompeu Fabra.
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in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207
National Bureau of Economic Research, Inc.
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- Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
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