Advertisement-Financed Credit Ratings

Christian Siemering

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: Traditional business models of credit rating agencies (CRAs) are criticized for creating incentives for misreporting. This paper investigates a potential alternative in which CRAs receive revenue from advertisement only. We use a two-period Bayesian reputation model and show that CRAs will shirk when their reputation is either very high or very low. When reputation is at a medium level, the prospect of exploiting better reputation in the future might discipline CRAs to exert high effort in the present. However, when misreporting is possible, the CRA will always shirk and conduct either rating inflation or deflation with positive probability.

JEL-codes: D82 G24 L15 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-fmk and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113195

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