Modelling the role of credit rating agencies-Do they spark off a virtuous circle?

In this paper, we propose a model of credit rating agencies using the global gamesframework to incorporate information and coordination problems. We introduce arefined utility function of a credit rating agency that, additional to reputationmaximization, also embeds aspects of competition and feedback effects of the ratingon the rated firms. Apart from hinting at explanations for several hypotheses withregard to agencies' optimal rating assessments, our model suggests that theexistence of rating agencies may decrease the incidence of multiple equilibria.[...]