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Credit rating and competition
Author(s) -
Camanho Nelson,
Deb Pragyan,
Liu Zijun
Publication year - 2022
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2303
Subject(s) - reputation , economics , competition (biology) , inflation (cosmology) , duopoly , welfare , credit rating , monopoly , monetary economics , microeconomics , market economy , finance , ecology , social science , physics , sociology , theoretical physics , biology
We analyze the effect of competition between credit rating agencies (RA) which trade‐off reputation (future income) and rating inflation (current income). We find that relative to monopoly, RA are more likely to inflate ratings under duopoly. Moreover, competition reduces welfare (the net income of the projects that are rated good) if the new entrant has low reputation and increases it if the new entrant has high reputation. Therefore, our results suggest that lowering barriers to entry (thus, allowing low‐reputation credit RA to enter the market) might increase the level of rating inflation and reduce welfare.