Are Competitive Rating Agencies Efficient?

Two very large companies, Moody's and Standard & Poor's, dominate the credit-rating industry. These two companies own around 80 per cent of the market. No other significant major competitors exist, though there are companies that rate local securities in places like China and India. In India, bulk of the ratings done by the two leading rating agencies—CRISIL (S&P majority stakeholder) and ICRA (Moody as the major stakeholder) have more than 80 per cent market share. Is this industry efficient? In this article, we present a simple theoretical model of competitive rating agencies. We establish that competition among rating agencies need not be efficient. We also show that despite price war, a more efficient rating agency will not necessarily drive out the inefficient one.