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Competition in the Credit Rating Industry

Economic Research Institute (+82-2-759-5407) 2008.03.24 3410

Competition in the Credit Rating Industry

The paper examines the significance of competition in the credit rating industry. A model of credit rating agency is constructed where the agency makes an efforts to acquire information as to the payoff distribution of a client firm, based on which to produce the credit rating. We find that the monopolist credit rating agency makes an effort less than the one preferred by the financial regulation authority if the cost borne by the rating agency is not sensitive to the accuracy of the credit rating. While competition on the rating precision under the fixed fee schedule may encourage the information acquisition effort, price competition may reduce the incentive to provide the effort.