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Title: Advertisement-Financed Credit Ratings

Author(s): Heidrun C. Hoppe-Wewetzer and Christian Siemering

Publication Date: May 2020

Keyword(s): advertisement, Credit rating agencies, Information Acquisition, rating precision and reputation

Programme Area(s): Financial Economics and Industrial Organization

Abstract: This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. We study a two-period endogenous reputation model in which the CRA can choose to provide private effort in evaluating financial products in each period. We show that the advertisement-based business model may provide sufficient incentives to improve the precision of signals when the CRA has an intermediate reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.

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Bibliographic Reference

Hoppe-Wewetzer, H and Siemering, C. 2020. 'Advertisement-Financed Credit Ratings'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14735