Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 01/2013: An Equilibrium Model of Credit Rating Agencies

Steinar Holden (), Gisle James Natvig () and Adrien Vigier ()
Additional contact information
Steinar Holden: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Gisle James Natvig: Norges Bank, Postal: Bankplassen 2, 0151 Oslo, Norway
Adrien Vigier: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings a ect investors' choice and, thereby, also issuers' access to funding and default risk. We show that in equilibrium { the informational content of credit ratings is inferior to that of CRAs' private information. We nd that CRAs have a pro-cyclical impact on default risk: in a liq- uidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating stan- dards tend to be pro-cyclical, while biased CRA-incentives will ultimately be self-defeating.

Keywords: Credit rating agencies; global games; coordination failure

JEL-codes: C72; D82; G24; G33

34 pages, December 18, 2012

Full text files

memo-01-2013.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Mari Strønstad Øverås ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2018-02-14 10:28:54.