Erschienen in:Paris December 2010 Finance Meeting EUROFIDAI - AFFI
Umfang:
1 Online-Ressource (39 p)
Sprache:
Englisch
DOI:
10.2139/ssrn.1695519
Identifikator:
Entstehung:
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 10, 2011 erstellt
Beschreibung:
We present an infinite horizon model that studies the competition between a relatively ineffective incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more effective but whose ability in appraising default risk is unproven at the time they enter the market. We show that free entry competition in the credit rating business fails in selecting the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment of issuers' default risk. Second, CRAs cannot charge higher fees for low rating than for high rating. Under these conditions a rather incompetent CRA can dominate the market without being worried about potentially more competent entrants. We derive policy implications