One Size Does Not Fit All : The Value of Information and Entry Strategies of Rating Agencies

This study investigates the production of information by multiple rating agencies when the value of information to buyers is heterogeneous. We modelled that an entrant may coexist with a monopoly incumbent by providing coarser and more economical ratings than the incumbent. Such a strategy can increase the utility of buyers with low information-value and does not necessarily lead to rating shopping. We empirically examined this model using the U.S. property-casualty insurance market as the testing environment. Our results indicate that the design of a rating scheme should align with the value of the information given to the target group. Multiple rating agencies with different rating schemes can coexist and serve heterogeneous information clienteles