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Do Prediction Markets Aid Defenders in a Weak-Link Contest?

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  • Cary Deck

    ()
    (Department of Economics, University of Arkansas and Economic Science Institute, Chapman University)

  • Li Hao

    ()
    (Department of Economics, University of Arkansas)

  • David Porter

    ()
    (Economic Science Institute, Chapman University)

Abstract

Laboratory experiments have demonstrated that prediction market prices weakly aggregate the disparate information of the traders about states (moves) of nature. However, in many practical applications one might want to predict the move of a strategic participant. This is particularly important in aggressor-defender contests. This paper reports a set of such experiments where the defender may have the advantage of observing a prediction market on the aggressor’s action. The results of the experiments indicate that: the use of prediction markets does not increase the defender’s win rate; prediction markets contain reliable information regarding aggressors’ decisions, namely excess bid information, that is not being exploited by defenders; and the existence of a prediction market alters the behavior of the aggressor whose behavior is being forecast.

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File URL: http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/Do%20Prediction%20Markets%20Aid%20Defenders%20in%20a%20Weak-Link%20Contest.pdf
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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 13-27.

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Length: 27 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:chu:wpaper:13-27

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Keywords: Information Aggregation; Prediction Markets; Weak-Link Contests; Colonel Blotto;

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  1. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1085-1118, September.
  2. Steven Gjerstad, 2004. "Risk Aversion, Beliefs, and Prediction Market Equilibrium," Microeconomics, EconWPA 0411002, EconWPA.
  3. Dechenaux, Emmanuel & Kovenock, Dan & Sheremeta, Roman M., 2012. "A survey of experimental research on contests, all-pay auctions and tournaments," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2012-109, Social Science Research Center Berlin (WZB).
  4. Paola Gallardo & Alexandra Heath, 2009. "Execution methods in foreign exchange markets," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.
  5. Yetkin ÇINAR & Türkmen GÖKSEL, 2012. "An experimental analysis of Colonel Blotto Games under alternative environments," Iktisat Isletme ve Finans, Bilgesel Yayincilik, Bilgesel Yayincilik, vol. 27(312), pages 39-57.
  6. Laslier, Jean-Francois & Picard, Nathalie, 2002. "Distributive Politics and Electoral Competition," Journal of Economic Theory, Elsevier, Elsevier, vol. 103(1), pages 106-130, March.
  7. Russell Golman & Scott Page, 2009. "General Blotto: games of allocative strategic mismatch," Public Choice, Springer, Springer, vol. 138(3), pages 279-299, March.
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