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Credible Ratings

  • Ettore Damiano
  • Hao Li
  • Wing Suen

This paper considers a model of a rating agency with multiple clients. ach client has a separate market (end-user of the rating); the only connection among them is that the underlying qualities of the clients are correlated. In the benchmark case of individual rating, the market for each client does not know the ratings for other clients. In centralized rating, the agency rates all clients together and shares the rating information among all markets. In decentralized rating, the ratings are again shared among all markets, but each client is rated by a self-interested rater of the agency with no access to the quality information of other clients. Both centralized rating and decentralized rating weakly dominate individual rating for the agency. When the underlying qualities are weakly correlated, centralized rating can dominate decentralized rating, but the reverse holds when the qualities are strongly correlated.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-219.

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Length: 40 pages
Date of creation: 11 Jan 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-219
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  9. Milgrom, Paul & Roberts, John, 1994. "Comparing Equilibria," American Economic Review, American Economic Association, vol. 84(3), pages 441-59, June.
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  11. William Chan & Hao Li & Wing Suen, 2005. "A Signaling Theory of Grade Inflation," Working Papers tecipa-222, University of Toronto, Department of Economics.
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