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Competition and Strategic Incentives in the Market for Credit Ratings: Empirics of the Financial Crisis of 2007

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  • Chenghuan Sean Chu
  • Marc Rysman

Abstract

We study the market for ratings agencies in the commercial mortgage backed securities sector leading up to and including the financial crisis of 2007–2008. Using a structural model adapted from the auctions literature, we characterize the incentives of ratings agencies to distort ratings in favor of issuers. We find an important equilibrium distortion, which decreased after the crisis. We study several counterfactual experiments motivated by recent policymaking in this industry.

Suggested Citation

  • Chenghuan Sean Chu & Marc Rysman, 2019. "Competition and Strategic Incentives in the Market for Credit Ratings: Empirics of the Financial Crisis of 2007," American Economic Review, American Economic Association, vol. 109(10), pages 3514-3555, October.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:10:p:3514-55
    Note: DOI: 10.1257/aer.20140773
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    Citations

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    Cited by:

    1. Silvia Marchesi & Tania Masi, 2020. "The price of haircuts: private and official default," Development Working Papers 460, Centro Studi Luca d'Agliano, University of Milano, revised 06 Feb 2020.
    2. Silvia Marchesi & Tania Masi & Pietro Bomprezzi, 2021. "Is to Forgive to Forget? Sovereign Risk in the Aftermath of a Default," Development Working Papers 475, Centro Studi Luca d'Agliano, University of Milano.
    3. Silvia Marchesi & Tania Masi & Pietro Bomprezzi, 2024. "Is to Forgive to Forget? Sovereign Risk in the Aftermath of Private or Official Debt Restructurings," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 292-334, March.
    4. Heidrun Hoppe-Wewetzer & Christian Siemering, 2022. "Advertisement-financed credit ratings," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 188-206, January.
    5. Barth, Andreas & Laturnus, Valerie & Mansouri, Sasan & Wagner, Alexander, 2021. "ICO analysts," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242429, Verein für Socialpolitik / German Economic Association.
    6. Silvia Marchesi & Tania Masi, 2019. "Sovereign risk after sovereign restructuring. Private and official default," Working Papers 423, University of Milano-Bicocca, Department of Economics, revised Nov 2019.
    7. Chandan Sharma & Archana Singh & Rajan Yadav, 2023. "Impact of Competition in Credit Rating Industry: Evidence From India," SAGE Open, , vol. 13(1), pages 21582440221, January.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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