Competition and Strategic Incentives in the Market for Credit Ratings: Empirics of the Financial Crisis of 2007
Chenghuan Sean Chu
- American Economic Review (Forthcoming)
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
policy-making in this industry.
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