51 Pages Posted: 23 Dec 2015 Last revised: 14 Mar 2017
Date Written: March 13, 17
I explore how compensation schemes aect a rating agency's incentive to rate accurately. A sequence of short-lived rms can hire a long-lived agency to rate their projects. The agency can privately acquire costly information about the projects. The agency may be committed to acquiring information or be fully strategic. In equilibrium, the agency charges a fee only if a rated project is sold. I consider regulations that require the agency to collect part or all of its fee whenever hired. Whenever the agency is impatient, these regulations result in less informative ratings and lower welfare. I discuss policy implications.
Keywords: Credit Rating Agencies, Reputation, Information Acquisition, Cuomo Plan
JEL Classification: D82, D83, G24
Suggested Citation: Suggested Citation
Bizzotto, Jacopo, Fees, Reputation, and Rating Quality (March 13, 17). Available at SSRN: https://ssrn.com/abstract=2707069