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The ownership of ratings


  • We thank George Dallas and Gurinder Badial from the Standard & Poor's Governance Unit and Jos Van Bommel for very stimulating conversations and two anonymous referees for very useful comments. We have also benefited from the comments of Gary Biglaiser, Patrick Bolton, Jacques Crémer, Thierry Foucault, Johannes Horner, Ailsa Roëll, and Hyun Shin, as well as of the seminar audiences at the Oxford Saïd Business School, the University of Southampton, the London Business School, the London School of Economics, INSEAD, the University of Edinburgh, UW Madison, Universidad Torcuato Di Tella, Universidad de Montevideo, the conference in tribute to Jean-Jacques Laffont, Toulouse 2005, and the CEPR Conference in Gerzensee 2006. All remaining errors are ours.


We identify the optimal contract between a rating agency and a firm and the circumstances under which simple ownership contracts implement this optimal solution. We assume that the decision to obtain a rating is endogenous and the price of a rating is a strategic variable. Clients hiding their ratings can be an equilibrium only if they are ex ante uncertain of their quality and if the hiring decision is not observable. For some distribution functions, a competitive rating market is necessary for this result to obtain. In this context, competition between rating intermediaries will lead to less information in equilibrium.