Premium
The ownership of ratings
Author(s) -
FaureGrimaud Antoine,
Peyrache Eloïc,
Quesada Lucía
Publication year - 2009
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2009.00063.x
Subject(s) - microeconomics , ex ante , context (archaeology) , competition (biology) , agency (philosophy) , intermediary , business , quality (philosophy) , economics , industrial organization , finance , paleontology , ecology , philosophy , macroeconomics , epistemology , biology
We identify the optimal contract between a rating agency and a firm and the circumstances under which simple ownership contracts implement this optimal solution. We assume that the decision to obtain a rating is endogenous and the price of a rating is a strategic variable. Clients hiding their ratings can be an equilibrium only if they are ex ante uncertain of their quality and if the hiring decision is not observable. For some distribution functions, a competitive rating market is necessary for this result to obtain. In this context, competition between rating intermediaries will lead to less information in equilibrium.