Affiliation:
1. Oslo Business School, Oslo Metropolitan University, Pilestredet 35, 0166 Oslo, Norway (email: )
2. Department of Economics, BI Norwegian Business School, Nydalsveien 37, 0484 Oslo, Norway (email: )
Abstract
We compare a credit rating agency’s incentives to acquire costly information when it is only paid for giving favorable ratings to the corresponding incentives when the agency is paid up-front, i.e., irrespective of the ratings assigned. We show that, in the presence of moral hazard, contingent fees provide stronger dynamic incentives to acquire information than up-front fees and may induce higher social welfare. When the fee structure is chosen by the agency, contingent fees arise as an equilibrium outcome, in line with the way the market for credit rating actually works. (JEL D21, D82, D83, G24)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
Cited by
3 articles.
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