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 mixed-strategy 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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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
326.
Find related papers by JEL classification: C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
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