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An experimental investigation of rating-market regulation

Author

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  • Claudia Keser
  • Asri Özgümüs
  • Emmanuel Peterlé
  • Martin Schmidt

Abstract

We introduce a simple game-theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit-rating agency. It involves up-front payments of issuer-fees and direct publication of requested ratings. Due to pecuniary injuries for untruthful ratings, the credit-rating agency should always report truthfully in the subgame perfect equilibrium. Knowing this, the issuer should never request a rating. Conducting laboratory experiments, we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution: issuers frequently do request ratings, which is often reciprocated with untruthful good ratings.

Suggested Citation

  • Claudia Keser & Asri Özgümüs & Emmanuel Peterlé & Martin Schmidt, 2017. "An experimental investigation of rating-market regulation," CIRANO Working Papers 2017s-08, CIRANO.
  • Handle: RePEc:cir:cirwor:2017s-08
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    Cited by:

    1. Matthias Weber & John Duffy & Arthur Schram, 2019. "Credit Default Swap Regulation in Experimental Bond Markets," Working Papers on Finance 1905, University of St. Gallen, School of Finance.
    2. Weber, Matthias & Duffy, John & Schram, Arthur, 2024. "Regulation and the demand for credit default swaps in experimental bond markets," European Economic Review, Elsevier, vol. 165(C).
    3. Liu, Yan, 2023. "Essays on credit rating agencies in China," Other publications TiSEM b54b3315-1185-48b8-aaf8-8, Tilburg University, School of Economics and Management.
    4. Wenming Xu & Yan Liu, 2021. "Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China," European Journal of Law and Economics, Springer, vol. 51(3), pages 433-468, June.
    5. Anna Bayona & Oana Peia & Razvan Vlahu, 2023. "Credit Ratings and Investments," Working Papers 776, DNB.
    6. Füllbrunn, Sascha & Neugebauer, Tibor, 2022. "Testing market regulations in experimental asset markets – The case of margin purchases," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1160-1183.

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    More about this item

    Keywords

    Game theory; laboratory experiments; rating agencies; regulation;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G0 - Financial Economics - - General

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