Fees, Reputation and Information Production in the Credit Rating Industry
61 Pages Posted: 23 Dec 2015 Last revised: 28 Feb 2018
Date Written: February 27, 2018
What is the best way to harness a credit rating agency's reputational concerns? We examine an agency's incentives to acquire costly information under different compensation schemes. We find that, relative to the case in which the agency is paid conditional on assigning a favorable rating, a policy requiring issuers to pay the agency irrespective of the ratings assigned need not improve social welfare. The reason is that fees paid upfront may reduce the agency's incentives to acquire information. However, if the regulator also monitors information acquisition, then upfront fees always improve social welfare.
Keywords: Credit Rating Agencies, Information Acquisition, Reputation
JEL Classification: D82, D83, G24
Suggested Citation: Suggested Citation