Abstract
I develop a model in which a duopoly of credit rating agencies endogenously use issuers as messengers to find out each other's assessments before offering ratings. Information flows between rating agencies when (i) rating agencies' incentives are aligned due to both of their ratings being pivotal and (ii) when issuers profit more from increasing overall volume than from selling highly rated bad assets. Information flows allow rating agencies to selectively offer higher ratings when the other agency's private assessment is more favorable. The model predicts that conditioning on each other's assessments leads to larger volume and lower rating standards. It is especially harmful when adverse selection is severe, agencies frequently disagree and asset payoffs are skewed to the left.
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