5.1 Monopolistic RA
Very first, we take into account the case in which you will find singular RA during the the marketplace. In order to make RA1 a beneficial monopolist, we put brand new 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, 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.
5.2 Competitive 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 Figure 7 reveals, the methods of RA1 are initial decreasing that have or flat from inside the RA2’s character, and increasing. This aftereffect of race are a variety of the newest disciplining impression while the industry-revealing effect. The new disciplining feeling was most effective if the a few RA’s reputations are romantic, and weakest in the event that one or two RA’s reputations was far aside, which suggests that odds of a big difference regarding industry commander is extremely brief. At the same time, industry-discussing effect is often broadening regarding competing RA’s profile. In the event the reputation of RA2 are lower, the business-discussing impression is quite short given that RA2 could only distance themself a fraction off business. Once the RA2’s character begins to raise, RA1 tends to rest faster just like the disciplining effect reigns over new market-revealing effect. not, when RA2’s reputation my dirty hobby exceeds a specific height, the market industry-sharing perception dominates as RA2’s profile becomes much higher than just RA1’s. Hence, RA1 will sit significantly more getting large philosophy from RA2’s reputation, as a result of the popularity of one’s field-sharing impression.