Research

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Certifier Competition and Product Quality (job market paper) (link to PDF)

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This paper models the effect of rating agency competition on the quality of rated securities. The quality of the securities is unknown. In each of two periods, an issuer exerts unobservable effort to improve the quality of a security and can hire rating agencies to rate it. The rating agencies observe noisy signals of quality and assign their ratings simultaneously and non-cooperatively. Each agency can be honest or strategic. An honest agency always rates according to its signal. A strategic agency can request a bribe to issue an undeserved rating. I compare equilibria across a regime of competition between two rating agencies and a monopolistic regime. In both regimes, all available agencies are hired in equilibrium, so under competition more ratings are observed. However, competing agencies do not fully internalize the return of a reputation for being honest. Whenever strategic agencies are not very concerned about their reputation, competition can induce more issuer effort than monopoly. Otherwise, a monopolistic agency induces more effort. Finally, the model is extended to compare the equilibria with agencies observing identical signals and agencies observing conditionally independent signals.

Contingent Payments and Certification Quality (link to PDF)

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The Cuomo Plan, a New York State regulation introduced in 2008, prohibits issuers of residential mortgage-backed securities from making payments to rating agencies contingent on the assigned ratings. The Plan’s objective was to address potential conflicts of interest among rating agencies. To evaluate the policy behind the Plan, I construct a certification model which consists of the following features: (i) an issuer privately informed about her security’s quality can hire a rating agency to assign a rating; (ii) the agency can observe, at a cost, a private signal correlated with the quality of the security; (iii) an undeserved favorable rating reduces the agency’s future revenues. I show that the Plan has an effect on the informative content of the rating only if the quality signal is cheap. The Plan discourages the issuer of a low-quality security from requesting a rating. The rating agency has less incentive to obtain the quality signal because the low-quality issuer infrequently requests a rating. Overall, the Plan ensures that the rating is more informative.

Social Learning among Heterogeneous Consumers (joint with A. Bandyopadhyay)

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A monopolistic firm sells a product to a sequence of consumers with heterogeneous preferences and some private information about the product’s quality. The firm can set a new price every time a consumer enters the market. Consumers purchase sequentially and observe the history of purchasing decisions, consumers’ preference types, and prices. Social learning takes place whenever the market infers a consumer’s private information from her decision to purchase. For a specific distribution of consumers’ preferences, we fully characterize (I) the conditions under which the monopolist’s expected payoff increases as a result of social learning, and (II) the relation between price and probability of social learning. Unlike the case of homogeneous consumers considered in \cite{bose2008monopoly}, the pricing strategy of a monopolist selling a new product may involve prices that are higher or lower than the static monopoly price.

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