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Emergence of Rating Agencies: Implications for Establishing a Regional Rating Agency in Asia

Author

Listed:
  • Tsai, Ying Yi

    (Asian Development Bank Institute)

  • Liu, Li-Gang

    (Asian Development Bank Institute)

Abstract

The present analysis sheds light on the setting up a regional rating agency in Asia in the wake of recent financial crisis. We investigate the policy facing a financial regulator while evaluating whether or not to admit new entrant into the credit rating market. In an incomplete contracting framework, we show that an impartial financial regulatory body (represented by a benevolent supranational organization) can facilitate credit ratings of high quality by allowing for the entry of new rating agencies on a non-single basis than it does for a mere single entry. This finding is caused by increased competition among the rating agencies, which induces higher quality of rating services even should rating agencies still exert below their maximum level of efforts.

Suggested Citation

  • Tsai, Ying Yi & Liu, Li-Gang, 2010. "Emergence of Rating Agencies: Implications for Establishing a Regional Rating Agency in Asia," ADBI Working Papers 241, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0241
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    References listed on IDEAS

    as
    1. Antoine Faure‐Grimaud & Eloïc Peyrache & Lucía Quesada, 2009. "The ownership of ratings," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 234-257, June.
    2. Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," The Journal of Business, University of Chicago Press, vol. 52(2), pages 231-261, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    credit rating agencies; moral hazard; incomplete contracting;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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