An enduring puzzle is why credit ratings are coarse indicators of issuer credit quality, with a relatively small number of ratings categories being used to describe credit qualities that lie in a continuum. We develop a theoretical model to explain why ratings are coarse even though coarseness...

We develop a model of a credit rating agency in which the rating agency expends due-diligence effort to learn about the issuer's credit risk, and the precision of its rating is predicated both on this effort and the rating agency's a priori unknown ability. We model the communication of ratings...

An enduring puzzle is why credit rating agencies (CRAs) use a few categories to describe credit qualities lying in a continuum, even when ratings coarseness reduces welfare. We model a cheap-talk game in which a CRA assigns positive weights to the divergent goals of issuing firms and investors....

This paper develops a theory in which housing prices, the capital structures of banks (mortgage lenders) and the capital structures of mortgage borrowers are all endogenously determined in equilibrium. There are four main results. First, leverage is a "positively correlated" phenomenon in that...

Faced with a pandemic, how does the government decide whether to shut down the economy or employ less economically-damaging mitigation measures, and what are the second-best distortions in this decision? We address this question from a positive (how does) rather than a normative (how should)...