Advertisement-Financed Credit Ratings

27 Pages Posted: 20 May 2020

See all articles by Heidrun C. Hoppe-Wewetzer

Heidrun C. Hoppe-Wewetzer

University of Hannover - Department of Economics; and CEPR

Christian Siemering

affiliation not provided to SSRN

Date Written: May 2020

Abstract

This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. We study a two-period endogenous reputation model in which the CRA can choose to provide private effort in evaluating financial products in each period. We show that the advertisement-based business model may provide sufficient incentives to improve the precision of signals when the CRA has an intermediate reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.

Keywords: advertisement, Credit rating agencies, Information Acquisition, rating precision, reputation

JEL Classification: D82, G24, L15

Suggested Citation

Hoppe-Wewetzer, Heidrun C. and Siemering, Christian, Advertisement-Financed Credit Ratings (May 2020). CEPR Discussion Paper No. DP14735, Available at SSRN: https://ssrn.com/abstract=3603966

Heidrun C. Hoppe-Wewetzer (Contact Author)

University of Hannover - Department of Economics; and CEPR ( email )

Koenigsworther Platz 1
30167 Hannover
Germany

HOME PAGE: http://www.mik.uni-hannover.de

Christian Siemering

affiliation not provided to SSRN

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