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De-Regulating Markets for Financial Information

Authors: Veldkamp, Laura
Kurlat, Pablo
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.
Rights: Copyright of Pablo Kurlat and Laura Veldkamp, 2011.
Appears in Collections:Economics Working Papers

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