For all t < T ? 1 , the strategy of the RA depends on its own and its competitors' reputation

When A is large, RA1 always gives a GramsR to a bad project. Conversely, when A is small RA1 behaves honestly and gives NR to bad projects. In the intermediate range, RA1 has a mixed strategy, with 0 < x₁ < 1 . Note that the lower threshold for A is increasing with RA1's reputation.

The results imply that RA1 tends to lie less as its reputation increases (Corollary 3). The intuition behind this result is straightforward. Since we assumed p_G = 1 , the reputation of RA1 goes to zero immediately after a project fails. This means that the cost of lying increases with RA1’s reputation while the benefit of lying stays constant. Hence, it is not surprising that RA1 prefers to lie less as its reputation increases. 18 18 Our results in Section 5 show that this is no longer true if p_G < 1 . The penalty on reputation will be smaller as the reputation of RA increases, that is, the cost of rating inflation can decrease with reputation, resulting in a “u-shaped” relationship between strategy and reputation.

Furthermore, based on Corollary step three, RA1’s method will increase with RA2’s profile. Since explained just before, race enjoys several reverse effects with the behaviour out-of RA1: the new disciplining effect and the sector-discussing perception. In the event the history of its opponent grows, RA1 will find it reduced popular with boost a unique profile considering a smaller sized expected future market share, and hence usually function even more laxly. Likewise, RA1 might have incentives to do something genuinely whenever RA2’s reputation increases to keep up their market frontrunner condition. Our data shows that the market industry-discussing impression can take over new disciplining perception. That prospective need is that the market share off a rating agencies is determined not just from the their profile relative to one to of its rival, and also by natural quantity of its profile. That’s, also a beneficial monopolistic RA do not react completely laxly, since the if not their reputation create feel as well low so you’re able to credibly rate most programs. Thus, the brand new incentives out of an effective RA to maintain an effective reputation, in lack of competition, give the latest disciplining effect of battle weaker. We feel this can be realistic as in reality, given intellectual investors, an effective monopolistic RA don’t have unbounded market efforts.

However, the results above are based on a three-period model with the assumption that p_G = 1 , that is, the strategic RA is caught immediately after the project fails. The results may be driven by the fact that the RAs only live for three periods, and hence have limited potential gains associated with higher reputation. In order to capture the long-term benefits of reputation under a more general setting, we move on to the next section, where we relax parameter assumptions and compute numerical solutions in an infinite-horizon case.

5 Infinite-Views Configurations

We currently expose the new mathematical solution of your model in the infinite vista. The fresh mathematical option would be once more determined having fun with backward induction, that’s, we earliest solve the brand new model from the finite months situation, then increase the number of episodes therefore the harmony approach converges with the unlimited-panorama solution.

We assume that the model ends at period T and solve the model backwards. We know that the strategic RA will older women dating review always lie at period T and T ? 1 , according to Corollary 2. We solve for the equilibrium strategy of the RA described in Section 3. We look at the pay-offs from lying and being honest and determine the strategy. As long as for x_t = 1 , RA1 will always choose to lie. Conversely, if for x_t = 0 , RA1 will always tell the truth. In all other intermediate cases, there exists a unique x_t states that at which RA1 is indifferent between lying or not. Hence, we deduce inductively the equilibrium strategies of RA1. As T goes to infinity, we approach the infinite horizon solution. Since ? < 1 , the Blackwell conditions are satisfied.