Choice of Rating Technology and Loan Pricing in Imperfect Credit Markets

Accurate rating systems are of central importance for banks to price and manage their loan portfolios. A bank's choice to invest in a more accurate rating technology is based on a trade-off: the better rating system usually comes at higher cost, but endows the bank with a competitive advantage, which includes potentially better access to funds. This paper models the rating technology choice of a bank as a two-stage game in an oligopolistic banking sector. (author's abstract)