An Experimental Investigation of Rating-Market Regulation
Georg-August-Universitat Gottingen, Number 299, January 2017
23 Pages Posted: 11 Jan 2017
Date Written: January 9, 2017
We introduce a simple game-theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit-rating agency. It involves up-front payments of issuer-fees and direct publication of requested ratings. Due to pecuniary injuries for untruthful ratings, the creditrating agency should always report truthfully in the subgame perfect equilibrium. Knowing this, the issuer should never request a rating. Conducting laboratory experiments, we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution: issuers frequently do request ratings, which is often reciprocated with untruthful good ratings.
Keywords: Game theory, laboratory experiments, rating agencies, regulation
JEL Classification: C70, C9, G0
Suggested Citation: Suggested Citation