My model also offers an explanation for the controversial practice of issuing unsolicited credit ratings.3 It suggests such ratings should be informative. Inthe model, the rating agency's choice of ratings informativeness and the rating fee lead to an endogenous threshold quality level, such that all issuers with higher quality purchase ratings. By raising the average quality of unrated firms, increases in this threshold present the possibility thatunrated issuers can access public markets. Such access jeopardizes the gatekeeper status of the rating agency, and reduces fees it can charge for solicited ratings. Unsolicited ratings act as a strategic pricing tool that allows the rating agency to extract higher rents from paying customers.However, unsolicited ratings lead to underinvestment when borrowers with positive-NPV projects that do not receive unsolicited ratings are unable to raise financing.
The second part of the result suggests that there is a discontinuity in the entrepreneurs' willingness to pay that arises when unrated entrepreneurs become good enough, on average, to borrow from public lenders. To understand this discontinuity, consider the behavior of the marginal ratingcustomer, who is indifferent between purchasing a rating and investing in the safe project without purchasing a rating. As the price of a rating increases, the rating threshold (which defines the quality of this marginal customer) also increases, raising the average quality of entrepreneurs who donot purchase a rating.
Going Under (2004) *Unrated*
Our second initiative, also supported by SAFETEA-LU, is the rulemaking establishing a National Registry of Certified Medical Examiners. The Registry will provide a list of medical examiners who are authorized to perform the physical qualification examinations for the more than 6 million truck and motorcoach drivers operating in interstate commerce. Our goal is to require ongoing competency of medical examiners through training, testing, certification and recertification. This will ensure that medical examiners fully understand, and remain competent to perform medical examinations for commercial vehicle drivers. 2ff7e9595c
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