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Credible Ratings

Author

Listed:
  • Ettore Damiano
  • Hao Li
  • Wing Suen

Abstract

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.

Suggested Citation

  • Ettore Damiano & Hao Li & Wing Suen, 2006. "Credible Ratings," Working Papers tecipa-219, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-219
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    References listed on IDEAS

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    Cited by:

    1. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
    2. repec:got:cegedp:143 is not listed on IDEAS
    3. Mariano, Beatriz, 2012. "Market power and reputational concerns in the ratings industry," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1616-1626.
    4. Tim Ehlers & Robert Schwager, 2016. "Honest Grading, Grade Inflation, and Reputation," CESifo Economic Studies, CESifo Group, vol. 62(3), pages 506-521.
    5. Yun Wang & Yilan Xu, 2015. "Race to the Top: Credit Rating Bias from Competition," Working Papers 2015-05-12, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University, revised 10 Jul 2015.
    6. Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207, National Bureau of Economic Research, Inc.
    7. Ehlers, Tim & Schwager, Robert, 2012. "Honest grading, grade inflation and reputation," University of Göttingen Working Papers in Economics 143, University of Goettingen, Department of Economics.
    8. Ehlers, Tim & Schwager, Robert, 2012. "Honest Grading, Grade Inflation and Reputation," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62051, Verein für Socialpolitik / German Economic Association.

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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