Honest certification and the threat of capture

Strausz, Roland

doi:10.1016/j.ijindorg.2004.09.002

Cited by 108 publications

(58 citation statements)

References 12 publications

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“…We moreover do not address possible issues concerning the platform's commitment to enforce the mechanism honestly. Since the platform is a long-term player we conjecture that its honesty can be uphold by well-known reputational arguments in repeated games (see Strausz, 2005). This however requires payments to the platform, another aspect we do not touch upon.…”

Section: Resultsmentioning

confidence: 96%

A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard

Strausz¹

2017

American Economic Review

Self Cite

311

144

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Crowdfunding provides the innovation that, before the investment, entrepreneurs contract with consumers. Under demand uncertainty, this improves a screening for valuable projects. Entrepreneurial moral hazard threatens this benefit. Focusing on the trade-off between value screening and moral hazard, the paper characterizes optimal mechanisms. Current crowdfunding schemes reflect their salient features. Efficiency is sustainable only if returns exceed investment costs by a margin reflecting the degree of moral hazard. Constrained efficient mechanisms exhibit underinvestment. Crowdfunding blurs the distinction between finance and marketing, but complements rather than substitutes traditional entrepreneurial financing. As a screening tool for valuable projects, crowdfunding unambiguously promotes social welfare.

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Section: Resultsmentioning

confidence: 96%

A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard

Strausz¹

2017

American Economic Review

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311

144

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“…8 There are other explanations of why an information intermediary might manipulate information. Manipulation can occur due to collusion between the intermediary and the seller; for example, Strausz (2005) shows that the threat of collusion makes honest certification a natural monopoly. Peyrache and Quesada (2005) argue that mandatory certification makes intermediaries more prone to collusion by increasing the participation of low quality sellers.…”

Section: Related Literaturementioning

confidence: 99%

Information effect of entry into credit ratings market: The case of insurers' ratings

Doherty

Kartasheva

Phillips

2012

Journal of Financial Economics

113

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The paper analyzes the effect of competition between credit rating agencies (CRAs) on the information content of ratings. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant designs a rating scale distinct from that of the incumbent. It targets higher-than-average companies in each rating grade of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's (S&P) entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings. The empirical analysis reveals that S&P required higher standards to assign a rating similar to the one assigned by A.M. Best and that higher-than-average quality insurers in each rating category of A.M. Best chose to receive a second rating from S&P. Keywords ratings, competition, information disclosure, insurance Disciplines Economics | FinanceThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/bepp_papers/121Electronic copy available at: http://ssrn.com/abstract=1101700Electronic copy available at: http://ssrn.com/abstract=1101700Information effect of entry into credit ratings market:The case of insurers' ratings * Neil A. Doherty † Anastasia V. Kartasheva ‡ Richard D. Phillips § August 21, 2011Abstract This paper analyzes the optimal entry strategy of a credit rating agency (CRA) to a market served by the incumbent. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant targets higher-than-average companies in each rating class of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings.Keywords: rating agency, entry, competition, precision and disclosure of information, insurance. 1Electronic copy available at: http://ssrn.com/abstract=1101700Electronic copy available at: http://ssrn.com/abstract=1101700Significant debate exists regarding the role that competition should play in the market for credit ratings. Representatives from the credit rating agencies (CRAs) themselves argue that reducing barriers to entry would eventually lead to reduced disclosure of information as the new entrants engage in "race to the bottom" strategies in order to sell Considering the unique dynamics of our market, historically new market entrants and marginal participants have sought to make their products more attractive to issuers by offering higher ratings than do more established market participants. Some new entrants might be inclined to try to compete in this manner because of the ease with which such a strategy could be implemented and the short-term benefits that might accrue to the en...

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“…Based on a similar framework, Albano and Lizzeri [20] endogenize the seller's quality choice. Strausz [21] and Mathis et al [22] focus on the incentives of certifiers to rate the seller's quality honestly.…”

Section: Related Literaturesmentioning

confidence: 99%

Voluntary Certification of Agricultural Products in Competitive Markets: The Consideration of Boundedly Rational Consumers

Zhang

2016

Sustainability

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Market competition creates strategic incentives for firms to communicate private information about their own product quality through certification. Although voluntary certification has recently gained importance in the agricultural industry, information asymmetry is not always completely addressed. This study analyzes how the relative proportion of boundedly rational consumers in the market influences the effectiveness of voluntary certification mechanisms by using a duopoly game model of high-and low-quality firms. The presented results show that a change in the proportion of boundedly rational consumers leads to different certification behaviors and a different market equilibrium. We also find that the existence of boundedly rational consumers is an important factor in the failure of voluntary certification. Indeed, when the relative proportion of such consumers is very high, voluntary certification is ineffective at improving market efficiency.

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Honest certification and the threat of capture

Cited by 108 publications

References 12 publications

A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard

A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard

Information effect of entry into credit ratings market: The case of insurers' ratings

Voluntary Certification of Agricultural Products in Competitive Markets: The Consideration of Boundedly Rational Consumers

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