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Reputation And Honesty In A Market For Information

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  • Charness, Gary B
  • Garoupa, Nuno

Abstract

Previous works on asymmetric information in asset markets tend to focus on the potential gains in the asset market itself. We focus on the market for information and conduct an experimental study to explore, in a game of finite but uncertain duration, whether reputation can be an effective constraint on deliberate misinformation. At the beginning of each period, an uninformed potential asset buyer can purchase information, at a fixed price and from a fully-informed source, about the value of the asset in that period. The informational insiders cannot purchase the asset and are given short-term incentives to provide false information when the asset value is low. Our model predicts that, in accordance with the Folk Theorem, Pareto-superior outcomes featuring truthful revelation should be sustainable. However, this depends critically on beliefs about rationality and behavior. We find that, overall, sellers are truthful 89% of the time. More significantly, the observed frequency of truthfulness is 81% when the asset value is low. Our result is consistent with both mixedstrategy and trigger strategy interpretations and provides evidence that most subjects correctly anticipate rational behavior. We discuss applications to financial markets, media regulation, and the stability of cartels.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt5fh8v64g.

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Date of creation: 01 Sep 1998
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Handle: RePEc:cdl:ucsbec:qt5fh8v64g

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Keywords: Asymmetric Information; Reputation; Insider Regulation; Financial Markets;

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  1. Benabou, R. & Laroque, G., 1989. "Using Privileged Information To Manipulate Markets: Insiders, Gurus, And Credibility," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 513, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  3. Haddock, David D & Macey, Jonathan R, 1987. "Regulation on Demand: A Private Interest Model, with an Application to Insider Trading Regulation," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 30(2), pages 311-52, October.
  4. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(2), pages 400-438, August.
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