5.1 Monopolistic RA
First, we take into account the situation where discover only one RA during the the marketplace. To help make RA1 an effective monopolist, we put the latest reputation for RA2 so you can 0.
Figure 3 plots the strategy of the monopolistic RA for parameters ( ? , pGrams , ? ) = (0.5, 0.7, 0.9). 19 19 Note that, we have chosen this set of parameters ( ? , pG , ? ) = (0.5, 0.7 squirt free app, 0.9) for the purpose of illustration only, 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 pG . 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 pG ), 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 pG decreases.
5.dos Aggressive 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 ( ? , pG , ? ) = (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.
Furthermore, as the Shape 7 shows, the techniques out-of RA1 is very first coming down having or apartment from inside the RA2’s character, and growing. That it effect of race is actually a combination of the disciplining perception and also the sector-sharing impression. The fresh disciplining impression try most effective in the event the two RA’s reputations try romantic, and weakest when the two RA’s reputations is actually far apart, which suggests that the likelihood of a difference out of markets leader is very short. At the same time, the marketplace-sharing impact is always expanding regarding the competing RA’s profile. In the event the reputation of RA2 are lowest, the business-discussing impression is quite brief as RA2 can simply take away a tiny fraction out-of business. Given that RA2’s profile actually starts to increase, RA1 tends to lay shorter because the disciplining feeling dominates the fresh new market-sharing impression. Yet not, when RA2’s character surpasses a certain top, the market-discussing impact reigns over as the RA2’s reputation will get higher than simply RA1’s. Which, RA1 usually lie more for high opinions of RA2’s character, because of the dominance of your industry-revealing effect.
