Reputation as an Entry Barrier in the Credit Rating Industry

Doh-Shin Jeon and Stefano Lovo

No 675, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: We study competition between an incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more effective but whose ability in appraising default risk is unproven when they enter the market. We show that free entry competition fails to select the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment. Second, CRAs cannot charge higher fees for low rating than for high rating. Then, a rather incompetent CRA can dominate the market without concerns about entry. We derive policy implications.

Keywords: Credit Rating; Entry Barrier; Reputation; Credit Constraint; Private Information (search for similar items in EconPapers)
JEL-codes: D82 G29 L11 L13 L15 (search for similar items in EconPapers)
Date: 2011-05, Revised 2012-05-25
New Economics Papers: this item is included in nep-ban, nep-com, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Reputation as an Entry Barrier in the Credit Rating Industry (2012)
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