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Fasten, Erik R. and Hofmann, Dirk (October 2010): Two-sided Certification: The market for Rating Agencies. SFB/TR 15 Discussion Paper No. 338 [PDF, 461kB]


Certifiers contribute to the sound functioning of markets by reducing a symmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

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