5.step 1 Monopolistic RA

Earliest, i check out the circumstances in which discover just one RA inside the the market. To create RA1 an effective monopolist, we place the fresh history of RA2 so you can 0.

Figure 3 plots the strategy of the monopolistic RA for parameters ( ? , p_Grams , ? ) = (0.5, 0.7, 0.9). 19 19 Note that, we have chosen this set of parameters ( ? , p_G , ? ) = (0.5, 0.7, 0.9) for the purpose of illustration only, what is secret benefits and verified that our results are robust to other parameter specifications, the plot of which are available upon request. In particular, robustness checks of the main results (Section 5.3) are presented in Appendix B. We can clearly see the strategy of RA1 is “u-shaped” in its reputation. Intuitively, the RA’s strategy is determined by the trade-off between current fees and expected future income. When its reputation is very low, the RA’s expected future income is very small compared to current fees, hence it has little incentive to behave honestly. When its reputation increases, the RA’s future income becomes larger while current fees stay the same, the RA tends to lie less. However, when the RA’s reputation is very high, the penalty for lying decreases, and the RA starts to lie more. The reason that the penalty for lying decreases with reputation is that investors attribute project failures to bad luck rather than lax behaviour when they believe that the RA is very likely to be of the honest type.

Moreover, we can see from Figure 4 that the strategy of RA1 is increasing in ? but decreasing in p_G . 20 20 We have also verified that this result holds in the case of competitive RAs, the plots of which are available upon request. The intuition is that, the reputational penalty of lying depends on how the investors update their beliefs. If projects are more likely to be good (higher ? ) or if good projects are more likely to fail (lower p_G ), then a failure is more likely to be attributed to bad luck rather than lying. Anticipating this smaller cost of lying on reputation, the RA would choose to lie more when ? increases or p_G decreases.

5.2 Competitive RA

We now look at the impact of competition on the behaviour of RA by introducing a second RA (RA2). Figure 5 plots the strategy of RA1 for parameter values ( ? , p_G , ? ) = (0.5, 0.7, 0.9). Figures 6 and 7 show cross sections of this figure, for different values of q₂ and q₁ , respectively.

As we can see, the relationship between the reputation and strategy of RA1 remains “u-shaped” as in the monopolistic case. Moreover, as the reputation of RA2 increases, the reputation at which RA1 has minimum x₁ , that is, is least likely to lie, also increases. This is not surprising as the disciplining effect is greatest when the reputation of the competing RA (RA2) is close to the reputation of RA1. This is because when the RAs‘ reputations are close, it is more likely that the market leadership will change, resulting in more disciplined behaviour. Conversely, if the two RAs have very different reputations, the disciplining effect is relatively weaker.

Also, as the Contour seven reveals, the strategy out of RA1 try 1st coming down having or apartment when you look at the RA2’s profile, following increasing. This effect of battle is actually a variety of the latest disciplining impact and business-sharing perception. The latest disciplining effect was strongest when the a couple RA’s reputations was intimate, and you may weakest in the event the a couple RA’s reputations is much aside, which suggests your odds of a positive change out of sector commander is quite quick. As well, the market-sharing feeling is increasing in the contending RA’s profile. If history of RA2 was reduced, industry-sharing effect is quite small as RA2 can only just pull away a tiny fraction from market share. While the RA2’s character begins to improve, RA1 has a tendency to lie reduced while the disciplining perception reigns over this new market-discussing effect. not, when RA2’s profile surpasses a particular peak, the marketplace-discussing impression dominates because RA2’s profile becomes higher than RA1’s. Hence, RA1 commonly lay a great deal more getting highest beliefs of RA2’s profile, considering the prominence of your own business-revealing perception.