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Article: Credible Ratings

TitleCredible Ratings
Authors
KeywordsSignaling
Credibility
Individual rating
Centralized rating
Decentralized rating
Issue Date2008
PublisherSociety for Economic Theory. The Journal's web site is located at http://econtheory.org
Citation
Theoretical Economics, 2008, v. 3, p. 325-365 How to Cite?
AbstractThis paper considers a model of a rating agency with multiple clients, in which each client has a separate market that forms a belief about the quality of the client after the agency issues a rating. When the clients are rated separately (individual rating), the credibility of a good rating in an inflationary equilibrium of the signaling game is limited by the incentive of the agency to exaggerate the quality of the client. With a centralized rating, the agency rates all clients together and shares the rating information among all markets. This allows the agency to coordinate the ratings and achieve a higher average level of credibility for its good ratings than with individual rating. Under decentralized rating, the ratings are again shared among all markets, but each client is rated by a self-interested rater of the agency with no access to the quality information of other clients. When the underlying qualities of the clients are correlated, decentralized rating leads to a smaller degree of rating inflation and hence a greater level of credibility than under individual rating. Comparing centralized rating with decentralized rating, we find that centralized rating dominates decentralized rating for the agency when the underlying qualities are weakly correlated, but the reverse holds when the qualities are strongly correlated.
Persistent Identifierhttp://hdl.handle.net/10722/60160
ISSN
2015 Impact Factor: 1.732

 

DC FieldValueLanguage
dc.contributor.authorDamiano, Een_HK
dc.contributor.authorLi, Hen_HK
dc.contributor.authorSuen, Wen_HK
dc.date.accessioned2010-05-31T04:05:00Z-
dc.date.available2010-05-31T04:05:00Z-
dc.date.issued2008en_HK
dc.identifier.citationTheoretical Economics, 2008, v. 3, p. 325-365en_HK
dc.identifier.issn1933-6837en_HK
dc.identifier.urihttp://hdl.handle.net/10722/60160-
dc.description.abstractThis paper considers a model of a rating agency with multiple clients, in which each client has a separate market that forms a belief about the quality of the client after the agency issues a rating. When the clients are rated separately (individual rating), the credibility of a good rating in an inflationary equilibrium of the signaling game is limited by the incentive of the agency to exaggerate the quality of the client. With a centralized rating, the agency rates all clients together and shares the rating information among all markets. This allows the agency to coordinate the ratings and achieve a higher average level of credibility for its good ratings than with individual rating. Under decentralized rating, the ratings are again shared among all markets, but each client is rated by a self-interested rater of the agency with no access to the quality information of other clients. When the underlying qualities of the clients are correlated, decentralized rating leads to a smaller degree of rating inflation and hence a greater level of credibility than under individual rating. Comparing centralized rating with decentralized rating, we find that centralized rating dominates decentralized rating for the agency when the underlying qualities are weakly correlated, but the reverse holds when the qualities are strongly correlated.-
dc.languageengen_HK
dc.publisherSociety for Economic Theory. The Journal's web site is located at http://econtheory.orgen_HK
dc.relation.ispartofTheoretical Economicsen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectSignaling-
dc.subjectCredibility-
dc.subjectIndividual rating-
dc.subjectCentralized rating-
dc.subjectDecentralized rating-
dc.titleCredible Ratingsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=1933-6837&volume=3&spage=352&epage=392&date=2008&atitle=Credible+Ratingsen_HK
dc.identifier.emailSuen, WC: wsuen@econ.hku.hken_HK
dc.identifier.authoritySuen, WC=rp00066en_HK
dc.description.naturepublished_or_final_version-
dc.identifier.scopuseid_2-s2.0-53749084298-
dc.identifier.hkuros156033en_HK
dc.identifier.volume3-
dc.identifier.spage325-
dc.identifier.epage365-

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