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Reputation, Honesty, and Efficiency with Insider Information: an Experiment

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  • Gary Charness
  • Nuno Garoupa

Abstract

We conduct an experimental study of sales of insider information about an asset's future value, where the insiders cannot purchase the underlying asset. We examine whether such information is purchased, the quality of the information provided, and the subsequent accuracy of purchase decisions in the underlying asset market. Our design explores whether reputation, in a repeated game of finite (but uncertain) duration, is an effective constraint on deliberate strategic misinformation. The insiders have an immediate incentive to state that the asset value is high when its true value is low. We suggest an application to insider trading in financial information markets. With fixed matching, cooperative outcomes featuring truthful revelation are frequently achieved and sustained, even though this suggests subjects have sophisticated beliefs about the beliefs and behavior of others. As a comparison, we also conduct a control treatment with random rematching. Here, information purchase is less frequent, the rate of truthful revelation decreases, and efficiency is diminished. Our results suggest that most people anticipate that others realize the potential value of a good reputation.

Suggested Citation

  • Gary Charness & Nuno Garoupa, 2000. "Reputation, Honesty, and Efficiency with Insider Information: an Experiment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 425-451, June.
  • Handle: RePEc:bla:jemstr:v:9:y:2000:i:3:p:425-451
    DOI: 10.1111/j.1430-9134.2000.00425.x
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    Cited by:

    1. Garance Genicot & Gary Charness, 2004. "An Experimental Test of Risk-Sharing Arrangements," 2004 Meeting Papers 807, Society for Economic Dynamics.
    2. Gill, David & Prowse, Victoria & Vlassopoulos, Michael, 2013. "Cheating in the workplace: An experimental study of the impact of bonuses and productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 96(C), pages 120-134.
    3. Nick Feltovich & Sobei H. Oda, 2014. "Special Section: Experiments on Learning, Methods, and Voting," Pacific Economic Review, Wiley Blackwell, vol. 19(3), pages 260-277, August.
    4. Gary Charness & Garance Genicot, 2009. "Informal Risk Sharing in an Infinite‐Horizon Experiment," Economic Journal, Royal Economic Society, vol. 119(537), pages 796-825, April.
    5. Lafky, Jonathan & Wilson, Alistair J., 2020. "Experimenting with incentives for information transmission: Quantity versus quality," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 314-331.
    6. Jonathan Lafky & Alistair J. Wilson, 2015. "Quality vs. Quantity in Information Transmission: Theory and Experimental Evidence," CESifo Working Paper Series 5426, CESifo.

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