Who Should Pay for Credit Ratings and How?

Natalia Kovrijnykh () and Anil Kashyap

No 1125, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper analyzes a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on the credit rating agency's (CRA) effort, which is unobservable. We analyze optimal compensation contracts for the CRA that differ depending on whether the firm, investors or a social planner orders the rating. We find that rating errors are larger when the firm orders it than when investors do. However, investors ask for ratings inefficiently often. Which arrangement leads to a higher social surplus depends on the agents' prior beliefs about the project quality. We also show that competition among CRAs causes them to reduce their fees, put in less effort, and thus leads to less accurate ratings. Rating quality also tends to be lower for new securities. Finally, we find that optimal contracts that provide incentives for both initial ratings and their subsequent revisions can lead the CRA to be slow to acknowledge mistakes.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (20)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Who Should Pay for Credit Ratings and How? (2016)
Working Paper: Who Should Pay for Credit Ratings and How? (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1125

Access Statistics for this paper

More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().