Two-sided certification: The market for rating agencies

Erik R. Fasten and Dirk Hofmann

No 2010-007, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Certifiers contribute to the sound functioning of markets by reducing asymmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

Keywords: Certification; Rating Agencies; Asymmetric Information; Financial Markets (search for similar items in EconPapers)
JEL-codes: D82 G14 G24 L15 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2010-007

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