Credit Rating and Competition
In principle, credit rating agencies are supposed to be impartial observers that bridge the gap between private information of issuers and the information available to the wider pool of investors. However, since the 1970s, rating agencies have relied on an issuer-pay model, creating a conflict of interest the largest source of income for the rating agencies are the fees paid by the issuers the rating agencies are supposed to impartially rate. In this paper, we explore the trade-off between reputation and fees and find that relative to monopoly, rating agencies are more prone to inflate ratings under competition, resulting in lower expected welfare. Our results suggest that more competition by itself is undesirable under the current issuer-pay model and will do little to resolve the conflict of interest problem.
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- Patrick Bolton & Xavier Freixas & Joel Shapiro, 2010.
"The Credit Ratings Game,"
468, Barcelona Graduate School of Economics.
- Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The Credit Ratings Game," NBER Working Papers 14712, National Bureau of Economic Research, Inc.
- Patrick Bolton & Xavier Freixas & Joel Shapiro, 2010. "The credit ratings game," Economics Working Papers 1221, Department of Economics and Business, Universitat Pompeu Fabra.
- Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The credit ratings game," Economics Working Papers 1149, Department of Economics and Business, Universitat Pompeu Fabra.
- Bo Becker & Todd Milbourn, 2008. "Reputation and competition: evidence from the credit rating industry," Harvard Business School Working Papers 09-051, Harvard Business School, revised Sep 2010.
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