Fees, Reputation, and Rating Quality
61 Pages Posted: 23 Dec 2015 Last revised: 8 Nov 2017
Date Written: November 3, 2017
We study a credit rating agency with reputational concerns. We explore incentives to acquire costly information under different compensation schemes, and compare the social welfare achieved. We find that, relative to the case in which the agency is paid conditional on assigning a good rating, a policy requiring issuers to pay the agency irrespective of the rating assigned need not improve social welfare. The policy unambiguously improves social welfare if and only if the regulator also monitors the agency's choice of information acquisition (i.e., whether the agency shirks or acquires information).
Keywords: Credit Rating Agencies, Reputation, Information Acquisition.
JEL Classification: D82, D83, G24
Suggested Citation: Suggested Citation