Information Abusing of Rating Agency in “Beauty Contest”

This paper studies imitation behavior by subjects in information structure, for example rating agencies. We consider agencies make their rating based on knowledge of prior distribution, public signal, and private signal. They focus on two goals: accurately estimate the risk of the target, avoid giving rate far away from others. We find that agencies will overreact to the prior belief, public signal and underreact to the private signal. And we analyze the welfare the social welfare loss caused by this behavior and the impact on private information acquiring of this behavior.