The quality of credit ratings: A two-sided market perspective

This paper presents a formal model of a credit rating agency. I study the consequences of the transition from an “investor-pays” model to an “issuer-pays” model on the quality standard of credit ratings chosen by the agency. I find that such a transition is likely to generate a degradation of the quality standard, which may fall below the socially efficient level. Finally, I discuss empirical implications and several reform proposals to the business model of credit rating agencies.

► This paper presents a formal model of a credit rating agency. ► This paper studies the consequences of the transition from an “investor-pays” model to an “issuer-pays” model on the quality standard of credit ratings. ► This paper formalizes the conflict of interest that is inherent in the business model of credit rating agencies. ► This paper finds that such a transition is likely to generate a degradation of the quality standard. Such degradation may fall below the socially efficient level. ► This paper proposes some empirical and theoretical lines for further research.