Fear of Rejection? Tiered Certification and Transparency
The sub-prime crisis has shown a harsh spotlight on the practices of securities underwriters, which provided too many complex securities that proved to ultimately have little value. This uproar calls attention to the fact that the literature on intermediaries has carefully analyzed their incentives, but that we know little about the broader strategic dimensions of this market. The paper explores three related strategic dimensions of the certification market: the publicity given to applications, the coarseness of rating patterns and the sellers' dynamic certification strategies. In the model, certifiers respond to the sellers' desire to get a chance to be highly rated and to limit the stigma from rejection. We find conditions under which sellers opt for an ambitious certification strategy, in which they apply to a demanding, but non-transparent certifier and lower their ambitions when rejected. We derive the comparative statics with respect to the sellers' initial reputation, the probability of fortuitous disclosure, the sellers' self-knowledge and impatience, and the concentration of the certification industry. We also analyze the possibility that certifiers opt for a quick turnaround time at the expense of a lower accuracy. Finally, we investigate the opportunity of regulating transparency.
|Date of creation:||Oct 2008|
|Publication status:||published as Emmanuel Farhi & Josh Lerner & Jean Tirole, 2013. "Fear of rejection? Tiered certification and transparency," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 610-631, December.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucy White & Alan D. Morrison, 2002.
"Crises and Capital Requirements in Banking,"
OFRC Working Papers Series
2002fe05, Oxford Financial Research Centre.
- Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
- Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
- Josh Lerner & Jean Tirole, 2006. "A Model of Forum Shopping," American Economic Review, American Economic Association, vol. 96(4), pages 1091-1113, September.
- Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
- Gill, D. & Sgroi, D., 2003. "The Superiority of Tough Reviewers in a Model of Simultaneous Sales," Cambridge Working Papers in Economics 0335, Faculty of Economics, University of Cambridge.
- Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, vol. 44(2), pages 393-420, June.
- Mark J. McCabe & Christopher M. Snyder, 2005. "Open Access and Academic Journal Quality," American Economic Review, American Economic Association, vol. 95(2), pages 453-459, May. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14457. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.