Economics, Econometrics and Finance
4 years ago

Incentive contracts eliminate moral hazard in credit rating agencies.

Annals of economics and finance
Moral Hazard with Rating Agency: An Incentive Contracting Approach
Bappaditya Mukhopadhyay

Paper Summary

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Credit rating agencies may act irresponsibly due to a lack of oversight on their evaluation standards. To address this issue, incentive contracts based on expected debt returns can be used to encourage better behavior. By implementing these contracts, the moral hazard problem with rating agencies can be eliminated.