Working Paper: CEPR ID: DP14735
Authors: Heidrun C. Hoppewewetzer; Christian Siemering
Abstract: This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. We study a two-period endogenous reputation model in which the CRA can choose to provide private effort in evaluating financial products in each period. We show that the advertisement-based business model may provide sufficient incentives to improve the precision of signals when the CRA has an intermediate reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.
Keywords: credit rating agencies; rating precision; information acquisition; advertisement; reputation
JEL Codes: D82; G24; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| advertisement-based business model (M37) | precision of ratings (C52) |
| CRA's reputation (intermediate) (H26) | effort in signal accuracy (C58) |
| effort in signal accuracy (C58) | advertisement revenue (M37) |
| CRA's reputation (H26) | precision of ratings (C52) |
| advertisement revenues (state-contingent and high) (M38) | truthful reporting (Y30) |
| CRA's reputation (low/high) (G24) | effort in signal accuracy (C58) |
| CRA's nature (committed/opportunistic) (H84) | rating accuracy (C52) |