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Reputation as an Entry Barrier in the Credit Rating Industry

  • Jeon, Doh-Shin
  • Lovo, Stefano
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    We study competition between an incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more e¤ective but whose ability in appraising default risk is unproven when they enter the market. We show that free entry competition fails to select the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment. Second, CRAs cannot charge higher fees for low rating than for high rating. Then, a rather incompetent CRA can dominate the market without concerns about entry. We derive policy implications.

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    File URL: http://idei.fr/doc/wp/2012/jeon_lovo.pdf
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    Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 675.

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    Date of creation: 10 May 2011
    Date of revision: 25 May 2012
    Handle: RePEc:ide:wpaper:24498
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    1. ., 2006. "Recent Case Studies," Chapters, in: Reforming China’s State-owned Enterprises and Banks, chapter 9 Edward Elgar.
    2. ., 2006. "Early Case Studies of SOEs," Chapters, in: Reforming China’s State-owned Enterprises and Banks, chapter 8 Edward Elgar.
    3. ., 2006. "History and Development Studies," Chapters, in: The Elgar Companion to Development Studies, chapter 47 Edward Elgar.
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