Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154136
Authors: 
Bongaerts, Dion
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1703
Abstract: 
This paper investigates the economic viability and welfare contribution of alternatives to issuer-paid credit rating agencies (CRAs). To this end, it introduces a heterogeneous competition model for credit and ratings markets. Frictions among issuers or investors induce rating inflation from issuer-paid CRAs. Investor-paid CRAs suffer from three sources of free-riding and are generally not economically viable when competing with issuer-paid CRAs. Only for very limited parameter ranges can investor-paid CRAs thrive and counter rating inflation. Other proposed alternatives such as investor-produced ratings and CRA co-investments employ skin-in-the-game to induce proper screening accuracy. However, as traditional issuer-paid CRAs can cater better to issuers, such alternatives generate little demand or are implemented ineffectively. Hence, this paper provides an explanation for the evolution, dominance and resiliency of issuer-paid CRAs.
Subjects: 
competition
credit rating agencies
regulation
reputation
JEL: 
G24
G28
L14
ISBN: 
978-92-899-1111-5
Document Type: 
Working Paper

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