De-Regulating Markets for Financial Information

Abstract

In October 2009, the house financial services committee voted to study the effects of removing ratings requirements for credit products. Eliminating such requirements would allow the issuers of credit products to decide whether or not to pay a ratings agency to rate their asset. If such a rating was not provided by the asset issuer, investors themselves might purchase a rating. This paper studies the circumstances under which free markets for information will provide information, in the absence of government mandates and the efficiency properties of each regime. Although government regulation requires too much information for some assets and too little for others, private markets also suffer from inefficiencies stemming from the non-concave nature of information production. The results inform the debate about how and when to require information provision for a wide range of financial and non-financial products.