Research On The Conflicts Of Interest And Government Regulation Of Credit Rating Industry's Payment Mechanism In China

With the development of market economy and credit system, credit is becoming increasingly important. However, because of the asymmetric information, credit system not only provides convenience for the investors, issuers and other market players but also causes the credit risk of default. As a solution to information asymmetry, the credit rating industry arises. Sometimes the results of credit rating may affect the entire economy through influencing people's expectation. Originating from 1980s, the credit rating industry in China has made a large progress; however, it also gives rise to some problems due to the imperfection of market economy system and the lack of supporting laws and regulations. Especially, the debate of payment mechanism in the credit rating industry never stops.Because the issuer-pay model may lead to the conflicts of interest and the similarity of credit rating, people suggest changing the issuer-pay model to the investor-pay model. They think the investor-pay model can solve the problems of the similarity of credit rating to maintain credit rating agency's objectivity. But the investor-pay model may bring free-rider and it requires systematic guarantee. Owing to the spread of information and the absence of property rights protection, the value of the credit rating products cannot be achieved. For the credit rating agency, the fees it charged cannot cover its costs. Taking the lack of intellectual property rights protection into account, the investor-pay model is not feasible and the issuer-pay model is more suitable in China. What we should do is to reform the existing issuer-pay model and improve the government regulation.The current researches on credit rating industry's payment mechanism mostly focus on the pros and cons of issuer-pay model and investor-pay model, and yet it is not common to analyze the feasibility of the issuer-pay model and the schedule of credit rating fees. Thus, the author hopes to make a contribution in those respects. In this paper, the author uses various theories of industrial economics, information economics and game theory to analyze the nature of credit rating industry and probe into the feasibility of issuer-pay model.It helps to enrich the credit rating's literatures. There exists a great many credit rating industry's regulatory authorities in China, yet none of those authorities clearly define the credit rating industry's payment mechanism. The similarity of credit rating resulting from issuer-pay model is popular, and how to solve that is of important significance to the regulatory authorities even the entire economy. The practical significance of this paper lies in that it points out the reforming direction of credit rating industry's payment mechanism, and the new ideas on the ways of government regulation.There are six chapters in this paper, and the frame is as following:The first introductory chapter describes the importance of credit rating, the history of China's credit rating industry, and the current credit rating industry's payment mechanism.The second chapter reviews relevant literature, giving an overview of the literatures of credit rating industry and payment mechanism. It also points out the inadequacies of the existing literatures, which helps to broaden the train of thought.In the third chapter, this paper discusses the nature of the credit rating industry. It illustrates the origination of credit rating industry and the intermediary nature of the rating agencies theoretically. It demonstrates the feasibility of issuer-pay model through bilateral market theories and public goods theories. This chapter, which is one of the core chapters, evaluates the level of theoretical research.The fourth chapter briefly describes the present situation and problems of credit rating industry's payment mechanism in China. At first, it introduces the conflicts of interest, the similarity of credit rating in issuer-pay model, and then the current situation of government regulation.Chapter Five is to reform the current credit rating's payment mechanism and improve government regulation. For one thing, the credit rating agencies should attach importance to the reputation mechanism and build their good reputation. For another, the authorities should improve the government regulation, such as define the standards of entry, strengthen the laws and regulations of credit rating industry, and not limit the number of incumbents.Chapter Six is the concluding part. Based on the analysis above, it makes two policy recommendations:first, strengthen effective regulation of the credit rating industry and change the way of market entry control; second, make use of antitrust laws reasonably to promote the competition in credit rating industry. At the end of this paper, the author brings forward the inadequacies and further research direction.