Does competition affect truth-telling? An experiment with rating agencies


We use an experimental approach to study the effect of market structure on theincidence of misreporting by credit rating agencies. In the game, agencies receive asignal regarding the type of asset held by the seller and issue a report. The sellersthen present the asset, with the report if one is solicited, to the buyer for purchase.We find that competition among rating agencies significantly reduces the likelihoodof misreporting.

Review of Finance