For all t < T ? 1 , the strategy of the RA depends on its own and its competitors' reputation
When A is large, RA1 always gives a GramsR to a bad project. Conversely, when A is small RA1 behaves honestly and gives NR to bad projects. In the intermediate range, RA1 has a mixed strategy, with 0 < x1 < 1 . Note that the lower threshold for A is increasing with RA1's reputation.
The results imply that RA1 tends to lie less as its reputation increases (Corollary 3). The intuition behind this result is straightforward. Since we assumed pG = 1 , the reputation of RA1 goes to zero immediately after a project fails. This means that the cost of lying increases with RA1’s reputation while the benefit of lying stays constant. Hence, it is not surprising that RA1 prefers to lie less as its reputation increases. 18 18 Our results in Section 5 show that this is no longer true if pG < 1 . The penalty on reputation will be smaller as the reputation of RA increases, that is, the cost of rating inflation can decrease with reputation, resulting in a “u-shaped” relationship between strategy and reputation.
Moreover, centered on Corollary step three, RA1’s means sometimes raise having RA2’s reputation. Due to the fact informed me prior to, competition enjoys several reverse consequences with the behavior away from RA1: brand new disciplining feeling therefore the industry-discussing perception. In the event that reputation for their enemy increases, RA1 will get it quicker appealing to increase its reputation offered a smaller sized questioned future market share, and therefore often act significantly more laxly. On top of that, RA1 might have incentives to behave genuinely whenever RA2’s reputation grows to keep up their sector leader status. Our study shows that the marketplace-sharing effect tends to take over the brand new disciplining impact. You to definitely potential reasons is the fact that market share of a score company is set not just of the its reputation according to you to of the competition, in addition to by sheer quantity of their profile. That is, also an effective monopolistic RA do not operate entirely laxly, just like the if you don’t the character carry out become also reasonable to help you credibly rate really ideas. Hence, brand new incentives from an effective RA to keep up good reputation, in lack of race, render the fresh disciplining effectation of competition weaker. We feel this can be practical since actually, given mental traders, a beneficial monopolistic RA lack unbounded market energies.
However, the results above are based on a three-period model with the assumption that pG = 1 , that is, the strategic RA is caught immediately after the project fails. The results may be driven by the fact that the RAs only live for three periods, and hence have limited potential gains associated with higher reputation. datingranking.net/single-parent-match-review In order to capture the long-term benefits of reputation under a more general setting, we move on to the next section, where we relax parameter assumptions and compute numerical solutions in an infinite-horizon case.
5 Infinite-Opinions Settings
We currently introduce the fresh new numerical provider of your model inside the unlimited panorama. This new numerical solution is once more computed playing with backwards induction, which is, i very first solve the design about finite months situation, then boost the amount of attacks therefore the equilibrium strategy converges towards unlimited-opinions service.
We assume that the model ends at period T and solve the model backwards. We know that the strategic RA will always lie at period T and T ? 1 , according to Corollary 2. We solve for the equilibrium strategy of the RA described in Section 3. We look at the pay-offs from lying and being honest and determine the strategy. As long as for xt = 1 , RA1 will always choose to lie. Conversely, if for xt = 0 , RA1 will always tell the truth. In all other intermediate cases, there exists a unique xt states that at which RA1 is indifferent between lying or not. Hence, we deduce inductively the equilibrium strategies of RA1. As T goes to infinity, we approach the infinite horizon solution. Since ? < 1 , the Blackwell conditions are satisfied.
