TY  - JOUR
AU  - Skreta,Vasiliki
AU  - Veldkamp,Laura
TI  - Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14761
PY  - 2009
Y2  - February 2009
UR  - http://www.nber.org/papers/w14761
L1  - http://www.nber.org/papers/w14761.pdf
N1  - Author contact info:
Vasiliki Skreta
Leonard N. Stern School of Business
New York University
44 West 4th Street, Room 7-64
New York, NY 10012
E-Mail: vskreta@stern.nyu.edu

Laura Veldkamp
Stern School of Business
New York University
44 W Fourth Street,Suite 7-77
New York, NY 10012
Tel: 212/998-0527
Fax: 212/995-4218
E-Mail: lveldkam@stern.nyu.edu
AB  - Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings -- observe multiple ratings and disclose only the most favorable -- before auctioning their assets. When assets are simple, agencies' ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges. Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset's true quality. Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.
ER  -