Jeon, Doh-Shin and Lovo, Stefano (2011) Reputation as an Entry Barrier in the Credit Rating Industry. TSE Working Paper, n. 11-235, Toulouse

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We study competition between an incumbent Credit Rating Agency (CRA) and a sequence
of entrant CRAs that are potentially more effective but whose ability in appraising default
risk is unproven when they enter the market. We show that free entry competition fails
to select the most competent CRA as long as two conditions are met. First, investors and
issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment.
Second, CRAs cannot charge higher fees for low rating than for high rating. Then, a
rather incompetent CRA can dominate the market without concerns about entry. We
derive policy implications.

Item Type: Monograph (Working Paper)
Language: English
Date: 10 May 2011
Place of Publication: Toulouse
JEL Classification: D82 - Asymmetric and Private Information
G29 - Other
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Oligopoly and Other Imperfect Markets
L15 - Information and Product Quality; Standardization and Compatibility
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 18 Jan 2012 05:45
Last Modified: 02 Apr 2021 15:33
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