Natural Barrier to Entry in the Credit Rating Industry (Jeon D.-S., Lovo S.)


Abstract This paper examines whether there is a natural barrier to entry in the credit rating industry. We consider an in…nite horizon model in which each period, an original incumbent faces competition from an entrant randomly selected from a pool of ex ante identical potential entrants. The incumbent's accuracy is imperfect, constant and known while each entrant's true accuracy is unknown and can be perfect or completely noisy. In the benchmark in which the signal that a CRA receives is public information, we …nd that the market provides either a right or a socially excessive incentive to experiment with entrants. On the contrary, when the signal is private information, the experimentation never occurs. Our result suggests that a rather incompetent CRA can dominate the market without being worried about entry of potentially more competent entrants and can explain the current failure of the credit rating industry. We derive policy implications
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Libref/ Jeon D.-S., Lovo S. (2010) "Natural Barrier to Entry in the Credit Rating Industry", pp. 1 - 31
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