An Experimental Investigation of Rating-Market Regulation

Georg-August-Universitat Gottingen, Number 299, January 2017

23 Pages Posted: 11 Jan 2017

See all articles by Claudia Keser

Claudia Keser

University of Goettingen (Göttingen)

Asri Özgümüs

University of Goettingen (Göttingen)

Emmanuel Peterle

Université de Rennes 1

Martin Schmidt

Karlsruhe Institute of Technology

Date Written: January 9, 2017

Abstract

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

Keser, Claudia and Özgümüs, Asri and Peterle, Emmanuel and Schmidt, Martin, An Experimental Investigation of Rating-Market Regulation (January 9, 2017). Georg-August-Universitat Gottingen, Number 299, January 2017, Available at SSRN: https://ssrn.com/abstract=2896130 or http://dx.doi.org/10.2139/ssrn.2896130

Claudia Keser (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Göttinger Sieben 3
Göttingen, 37073
Germany

Asri Özgümüs

University of Goettingen (Göttingen) ( email )

Wilhelmsplatz 1
Göttingen, 37073
Germany

Emmanuel Peterle

Université de Rennes 1 ( email )

11 Rue Jean Macé
Rennes, Rennes 35700
France

Martin Schmidt

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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