Research

Firms compete for slots on an ad-financed platform by paying the platform to display their ads. In its design, the platform decides on its ``matching quality'' by choosing how much weight to give to each firm’s payment while taking into account consumers’ preferences. Increasing the quality makes the platform more desirable to the consumers, but also decreases its ad revenue per consumer since it softens competition for exposure among firms. In the optimal design, the platform actively mismatches (matches) the firm with high (low) profit per match by decreasing (increasing) the weight that its payment carries. When consumers’ favorite firm enjoys a higher profit per match than its rival, a *neutral* policy in which the platform does not influence matching, improves consumer welfare. The platform is welfare enhancing however, when the consumers’ preferred firm earns little per match. Moreover, better information about consumer tastes improves consumer welfare because the platform mismatches the better firm less often.

This paper presents a theoretical model of competition between information intermediaries applied to credit rating industry. Sellers rely on intermediaries to credibly communicate their quality to buyers. Intermediaries are strategic and compete in fees as well as their certification standards i.e. how strict they are in awarding a certification. Choices of fees and certification standards induce a signaling game between buyers and sellers where through their choice of intermediary, sellers can convey information about their quality to buyers. In equilibrium, intermediaries set differentiated certification standards. The leader sets a high standard and the follower sets the minimum standard of certification. This serves to relax price competition and leads to a two-tier market structure where high (low) quality sellers opt for intermediary with high (low) quality standards. The differentiated certification standards result is also tested empirically for the credit rating agencies who certify commercial banks. The empirical results confirm that credit rating agencies use differentiated rating standards in this market.

This paper investigates whether an *investor-paid* credit rating model leads to rating inflation. Using the corporate bond ratings of Egan-Jones Rating Company, I find evidence that an investor-paid rating agency tends to upgrade bonds that offer a higher yield. This suggests that an investor-paid rating agency can cater to the needs of the investors who *reach for yield* allowing them to bypass capital requirements of holding such bonds. This result support the theory that rating-contingent regulations in financial markets create incentives for inflated ratings, regardless of compensation structure of rating agencies.