Competition, Communication and Rating Bias

Miklós Farkas*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review


I compare the efficiency of different equilibria reached in a credit rating game that allows for communication between the issuer and two credit rating agencies (CRAs) prior to disclosing ratings. CRAs observe private signals that correlate with asset quality and can learn about each other’s signals by exchanging messages with the issuer. Conflicts of interest lead CRAs to provide biased ratings. When issuer messages are informative about signals, CRAs find it optimal to selectively offer biased ratings based on issuer messages. Messages are informative when the issuer discloses high ratings from both CRAs and profits more from increasing issuance than from selling its worst assets. The equilibrium in which only one CRA provides ratings leads to the highest efficiency when average asset quality is low, agency signals frequently disagree and asset payoffs are skewed.
Original languageEnglish
Pages (from-to)637-656
Number of pages20
JournalJournal of Economic Behavior and Organization
Early online date2 Aug 2021
Publication statusPublished - 1 Sep 2021

Bibliographical note

Publisher Copyright:
© 2021 Elsevier B.V.


  • Credit rating agency
  • Communication
  • Securitization
  • Market structure


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