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The Trust Alternative

54 Pages Posted: 1 Sep 2014 Last revised: 16 Dec 2016

Indraneel Chakraborty

University of Miami

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Malcolm Wardlaw

University of Texas - Dallas

Date Written: December 16, 2016

Abstract

We substantiate the feasibility of a market mechanism that addresses ratings shopping, ratings inflation, and encourages competition over rating accuracy among credit rating agencies (CRAs). An issuer strategically delegates the task to acquire ratings, from CRAs, to a pass-through non-monitoring platform (the "trust"). The trust operates as a commitment mechanism for the issuer and pays outcome-contingent fees, a large portion of which is paid upfront. In turn, high credit rating accuracy assures investors' participation in the market, creating the surplus that guarantees voluntary participation of CRAs and issuers. Overall, the mechanism creates a Pareto-improving equilibrium that requires minimal regulatory intervention.

Keywords: Platform-Pays, Ratings Inflation, Ratings Shopping, Rating Agencies

JEL Classification: D21, D43, G24

Suggested Citation

Chakraborty, Indraneel and Saretto, Alessio and Wardlaw, Malcolm, The Trust Alternative (December 16, 2016). Available at SSRN: https://ssrn.com/abstract=2489471 or http://dx.doi.org/10.2139/ssrn.2489471

Indraneel Chakraborty

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Alessio Saretto (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)

HOME PAGE: http://www.utdallas.edu/~axs125732

Malcolm Wardlaw

University of Texas - Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States
972-883-5903 (Phone)

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