Title: Credit Rating and Competition
Authors: Nelson Camanho, Pragyan Deb and Zijun Liu (all Department of Finance/FMG, LSE)
Award committee comments: Credit ratings agencies have been widely criticised for applying lax standards to structured products which played an important role in the recent financial crisis at least at its outset. Camanho, Deb and Liu tackle the important issue of the organisation of credit ratings agencies whose earnings are paid by the issuers they rate. They examine the trade-off between reputation and fees for such CRA's under alternative competitive environments. They find that in many circumstances a duopolist CRA is more likely to award an inflated rating than a monopolist CRA. This theoretical result represents a serious cause for reflection about the right path to take in regulating credit ratings agencies. Some have advocated reforms to bring a higher degree of competition to the industry. The Camanho-Deb and Liu paper raises a serious question about whether reform proposals in that direction will achieve the effects hope for by their advocates, if the "issuer-pay" business model of CRAs remains dominant.
No runner-up prize was awarded in 2011.