Selection in Unsolicited Ratings: the Case of the Sovereign Debt Market

Abstract

This paper aims at contributing to the debate on whether unsolicited ratings are strategically motivated. I present evidence from the sovereign debt market that strategic motivation is not necessarily behind the patterns that we see in the data and propose a model of credit ratings and ancillary services that abstracts from strategic considerations. In my model, borrowers with different unobservable characteristics select themselves into different solicitation groups. In equilibrium, the model can generate either a negative or a positive selection on unsolicited ratings, depending on the share of unsolicited ratings in a given market. The economic mechanism analyzed in this paper implies a "natural" degree of market selection which is not associated to strategic motivation.