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|Title: ||De-Regulating Markets for Financial Information|
|Authors: ||Veldkamp, Laura|
|Issue Date: ||30-Nov-2011 |
|Abstract: ||The Dodd-Frank Act will eliminate the requirement that credit products
must be rated before they can be sold to banks and pension funds.
Supporters argue that if the information in ratings is valuable, issuers
or investors will choose to buy the information, even without the
requirement. But free-rider problems abound: investors might not buy
ratings because asset prices partially reveal what others know and asset
issuers might not pay for ratings if they believe investors will buy
them anyway. This paper studies how removing ratings requirements
affects provision of financial information, asset prices and welfare. It
describes conditions under which de-regulated information markets could
collapse. But it explains why, when an information market collapses,
neither asset issuers nor investors prefer mandatory ratings.
Furthermore, a calibration exercise suggests that information market
collapse is unlikely. Instead, the repeal of ratings mandates will
simply shift the cost of information production from asset issuers to investors.|
|Appears in Collections:||Economics Working Papers|
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