Details
| Original language | English |
|---|---|
| Pages (from-to) | 188-206 |
| Number of pages | 19 |
| Journal | Journal of Economics and Finance |
| Volume | 46 |
| Issue number | 1 |
| Early online date | 8 Oct 2021 |
| Publication status | Published - Jan 2022 |
Abstract
This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. To this end, we study a two-period endogenous reputation model in which a CRA can increase the precision of its ratings by exerting effort. The CRA receives a revenue not from rating fees, as is standard in the literature, but through online advertising. We show that the advertisement-based business model provides sufficient incentives for the CRA to improve the precision of signals at intermediate levels of reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.
Keywords
- Advertisement, Credit rating agencies, Information acquisition, Rating precision, Reputation
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of Economics and Finance, Vol. 46, No. 1, 01.2022, p. 188-206.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Advertisement-financed credit ratings
AU - Hoppe-Wewetzer, Heidrun
AU - Siemering, Christian
PY - 2022/1
Y1 - 2022/1
N2 - This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. To this end, we study a two-period endogenous reputation model in which a CRA can increase the precision of its ratings by exerting effort. The CRA receives a revenue not from rating fees, as is standard in the literature, but through online advertising. We show that the advertisement-based business model provides sufficient incentives for the CRA to improve the precision of signals at intermediate levels of reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.
AB - This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. To this end, we study a two-period endogenous reputation model in which a CRA can increase the precision of its ratings by exerting effort. The CRA receives a revenue not from rating fees, as is standard in the literature, but through online advertising. We show that the advertisement-based business model provides sufficient incentives for the CRA to improve the precision of signals at intermediate levels of reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.
KW - Advertisement
KW - Credit rating agencies
KW - Information acquisition
KW - Rating precision
KW - Reputation
UR - http://www.scopus.com/inward/record.url?scp=85116738319&partnerID=8YFLogxK
U2 - 10.1007/s12197-021-09562-8
DO - 10.1007/s12197-021-09562-8
M3 - Article
AN - SCOPUS:85116738319
VL - 46
SP - 188
EP - 206
JO - Journal of Economics and Finance
JF - Journal of Economics and Finance
SN - 1055-0925
IS - 1
ER -