52 Pages Posted: 23 Jan 2013 Last revised: 15 Jun 2018
Date Written: May 29, 2018
A rater is paid by a seller, observes a signal about the seller's product, and issues a public cheap-talk rating for potential buyers. I characterize the partition of the rater's information into ratings issued following public payments from the seller to the rater, and ratings issued when the seller pays the rater in private. Public payments support precise ratings in equilibrium. Private payments tend to be inflated for high ratings, which endogenously leads to coarse ratings in equilibrium. A competitive rater issues uninformative ratings when payments are private. Under public payments, a competitive rater issues a coarse rating for signals below a threshold and precise ratings for signals above the threshold.
Keywords: cheap talk, rating agency, mechanism design, transparency, disclosure, limited commitment, certification
JEL Classification: G24, G28, D82, L15
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