An experimental investigation of rating-market regulation

Claudia Keser, Asri Özgümüs, Emmanuel Peterle () and Martin Schmidt

Journal of Economic Behavior & Organization, 2017, vol. 144, issue C, 78-86

Abstract: We introduce a simple game-theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit-rating agency. It involves up-front payments of issuer-fees and direct publication of requested ratings. Due to pecuniary injuries for untruthful ratings, the credit-rating agency should always report truthfully in the subgame perfect equilibrium. Knowing this, the issuer should never request a rating. Conducting laboratory experiments, we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution: issuers frequently do request ratings, which is often reciprocated with untruthful good ratings.

Keywords: Game theory; Laboratory experiments; Rating agencies; Regulation (search for similar items in EconPapers)
JEL-codes: C70 C9 G0 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: An experimental investigation of rating-market regulation (2017)
Working Paper: An experimental investigation of rating-market regulation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:144:y:2017:i:c:p:78-86

DOI: 10.1016/j.jebo.2017.09.022

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