Credible Ratings

Ettore Damiano (), Hao Li and Wing Suen

Microeconomics.ca working papers from Vancouver School of Economics

Abstract: This paper considers a model of a rating agency with multiple clients. Each 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.

Pages: 40 pages
Date: 2006-01-17, Revised 2006-01-17
New Economics Papers: this item is included in nep-fmk
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Related works:
Journal Article: Credible ratings (2008)
Working Paper: Credible Ratings (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ubc:pmicro:damiano-06-01-17-01-56-45

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