Who Should Pay for Credit Ratings and How?

56 Pages Posted: 29 Mar 2013

See all articles by Anil K. Kashyap

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Natalia Kovrijnykh

Arizona State University (ASU) - Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

We analyze a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on unobservable effort exerted by a credit rating agency (CRA). We study optimal compensation schemes for the CRA when a planner, the firm, or investors order the rating. Rating errors are larger when the firm orders it than when investors do (and both produce larger errors than is socially optimal). Investors overuse ratings relative to the firm or planner. A trade-off in providing time-consistent incentives embedded in the optimal compensation structure makes the CRA slow to acknowledge mistakes.

Suggested Citation

Kashyap, Anil K. and Kovrijnykh, Natalia, Who Should Pay for Credit Ratings and How? (March 2013). NBER Working Paper No. w18923. Available at SSRN: https://ssrn.com/abstract=2241392

Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

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Natalia Kovrijnykh

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

HOME PAGE: http://www.public.asu.edu/~nkovrijn

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