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Parimutuel Betting under Asymmetric Information

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  • Frederic Koessler
  • Anthony Ziegelmeyer

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Abstract

This paper examines finite parimutuel betting games with asymmetric information, with particular attention to differences between sequential and simultaneous settings, and between fully rational and myopic ("price taking") behavior. In the simultaneous parimutuel market, all (symmetric and asymmetric) Bayesian-Nash equilibria are generically characterized depending on the number of bettors and the quality of their private information. There always exists a separating equilibrium, where all bettors follow their private signal. This equilibrium becomes unique as the number of bettors increases, and it corresponds to the strategy profile used by myopic bettors. In the sequential framework, the perfectly revealing equilibrium disappears as the number of betting periods increases, whether or not bettors fully anticipate their impact on future odds. In both cases (rational and myopic betting), due to the interaction between information externalities generated by observational learning and payoff externalities generated by betting odds, bettors arbitrate between following their private signal, following the choices of previous bettors, and betting against the trend. Extreme effects based on herd behavior occur in identifiable states of the world, leading to significant short run mispricing.

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Bibliographic Info

Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2003-34.

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Length: 34 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:esi:discus:2003-34

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Cited by:
  1. Nicolas Carayol & Pascale Roux & Murat Yıldızoglu, 2006. "Coordination failures in network formation," Working Papers of BETA 2006-03, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Estelle Dhont-Peltrault & Etienne Pfister, 2007. "R&D cooperation versus R&D subcontracting: empirical evidence from French survey data," Working Papers of BETA 2007-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Gisèle Umbhauer, 2007. "De l’amiante au chrysotile, un glissement stratégique dans la désinformation," Working Papers of BETA 2007-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  4. Frédéric KOESSLER & Anthony ZIEGELMEYER, 2002. "Parimutuel Betting under Asymmetric Information," Working Papers of BETA 2002-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  5. Erik Eyster & Andrea Galeotti & Navin Kartik & Matthew Rabin, 2012. "Congested Observational Learning," Economics Discussion Papers 706, University of Essex, Department of Economics.
  6. Jalal EL OUARDIGHI & Rabija SOMUN-KAPETANOVIC, 2006. "Convergence des contributions aux inégalités de richesse dans le développement des pays européens," Working Papers of BETA 2006-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  7. Rachel Levy & Paul Muller, 2006. "Do academic laboratories correspond to scientific communities? Evidence from a large European university," Working Papers of BETA 2006-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  8. Sofia Pessoa e Costa & Stéphane Robin, 2007. "The Impact Of Training Programmes On Wages In France: An Evaluation Of The “Qualifying Contract” Using Propensity Scores," Working Papers of BETA 2007-18, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  9. Marco Ottaviani & Peter Norman Sørensen, 2003. "Late Informed Betting and the Favorite-Longshot Bias," Discussion Papers 03-33, University of Copenhagen. Department of Economics.
  10. Meixing DAI, 2007. "A two-pillar strategy to keep inflation expectations at bay: A basic theoretical framework," Working Papers of BETA 2007-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  11. Meixing DAI & Moïse SIDIROPOULOS & Eleftherios SPYROMITROS, 2007. "La transparence de la politique monétaire et la dynamique des marchés financiers," Working Papers of BETA 2007-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  12. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Jena Economic Research Papers 2007-033, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  13. Frederic Koessler & Ch. Noussair & A. Ziegelmeyer, 2005. "Individual Behavior and Beliefs in Experimental Parimutuel Betting Markets," THEMA Working Papers 2005-08, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  14. Giovanni Dosi & Patrick Llerena & Mauro Sylos Labin, 2005. "Science-Technology-Industry Links and the ”European Paradox”: Some Notes on the Dynamics of Scientific and Technological Research in Europe," Working Papers of BETA 2005-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  15. Stéphane Betrand & Kene Boun My & Alban Verchère, 2005. "Faire émerger la coopération internationale : une approche expérimentale comparée du bilatéralisme et du multilatéralisme," Working Papers of BETA 2005-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  16. Nicolas Carayol & Pascale Roux, 2006. "A strategic model of complex networks formation," Working Papers of BETA 2006-02, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  17. Tapas K. Mishra, 2006. "A Further Look into the Demography-based GDP Forecasting Method," Working Papers of BETA 2006-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  18. Li Qin & Eleftherios Spyromitros & Moïse Sidiropoulos, 2007. "Monetary Policy with Uncertain Central Bank Preferences for Robustness," Working Papers of BETA 2007-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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