Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/90767 
Year of Publication: 
2013
Series/Report no.: 
Memorandum No. 01/2013
Publisher: 
University of Oslo, Department of Economics, Oslo
Abstract: 
We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings a ffect investors' choice and, thereby, also issuers' access to funding and default risk. We show that in equilibrium - the informational content of credit ratings is inferior to that of CRAs' private information. We fi nd that CRAs have a pro-cyclical impact on default risk: in a liquidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating standards tend to be pro-cyclical, while biased CRA-incentives will ultimately be self-defeating.
Subjects: 
credit rating agencies
global games
coordination failure
JEL: 
G24
G33
D82
C72
Document Type: 
Working Paper

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