Who Should Pay for Credit Ratings and How ? ∗

@inproceedings{Kashyap2012WhoSP,
  title={Who Should Pay for Credit Ratings and How ? ∗},
  author={Anil Kumar Kashyap and Natalia Kovrijnykh},
  year={2012}
}
We analyze a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on unobservable effort exerted by a credit rating agency (CRA). We study optimal compensation schemes for the CRA when a planner, the firm, or investors order the rating. Rating errors are larger when the firm orders it than when investors do (and both produce larger errors than is socially optimal). Investors overuse ratings relative to the firm or planner. A tradeoff in… CONTINUE READING
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