The quality of credit ratings: A two-sided market perspective

This paper presents a formal model of a credit rating agency. I study the consequences of the transition from an “investor-pays” model to an “issuer-pays” model on the quality standard of credit ratings chosen by the agency. I find that such a transition is likely to generate a degradation of the quality standard, which may fall below the socially efficient level. Finally, I discuss empirical implications and several reform proposals to the business model of credit rating agencies.