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On insider trading and belief evolution

Author

Listed:
  • Thomas Gehrig
  • Werner Güth
  • René Levínský

    ()

Abstract

In a market with stochastic demand with seller competition at most one seller can acquire costly information about demand. Other sellers entertain idiosyncratic beliefs about the market demand and the probability that an informed seller is trading in the market. These idiosyncratic beliefs co-evolve with the potential insider’s inclination to acquire information.True demand expectations (in the Bayesian sense) are not evolutionarily stable when beliefs, via revelation, can be used to commit to more aggressive behavior. The commitment effect fades away in large markets and has the same direction for both strategic substitutes and complements. Whether one observes an insider, in the long run, depends on information costs. For strategic substitutes insider activity benefits the whole population whereas the uninformed sellers could gain even more than the insider. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Thomas Gehrig & Werner Güth & René Levínský, 2013. "On insider trading and belief evolution," Journal of Evolutionary Economics, Springer, vol. 23(4), pages 767-781, September.
  • Handle: RePEc:spr:joevec:v:23:y:2013:i:4:p:767-781
    DOI: 10.1007/s00191-013-0321-9
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    References listed on IDEAS

    as
    1. Werner Güth & Hartmut Kliemt & Bezalel Peleg, 2000. "Co-evolution of Preferences and Information in Simple Games of Trust," German Economic Review, Verein für Socialpolitik, vol. 1(1), pages 83-110, February.
    2. Bester, Helmut & Guth, Werner, 1998. "Is altruism evolutionarily stable?," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 193-209, February.
    3. Gehrig, Thomas & Guth, Werner & Levinsky, Rene, 2004. "The commitment effect in belief evolution," Economics Letters, Elsevier, vol. 85(2), pages 163-166, November.
    4. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    5. Esther Gal-Or, 1988. "The Advantages of Imprecise Information," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 266-275, Summer.
    6. Geanakoplos, John & Pearce, David & Stacchetti, Ennio, 1989. "Psychological games and sequential rationality," Games and Economic Behavior, Elsevier, vol. 1(1), pages 60-79, March.
    7. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    8. Ross Cressman, 2003. "Evolutionary Dynamics and Extensive Form Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033054, March.
    9. William Novshek & Hugo Sonnenschein, 1982. "Fulfilled Expectations Cournot Duopoly with Information Acquisition and Release," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 214-218, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Evolution of beliefs; Inside information; Heterogeneous markets; Information sharing; C79; D43; D82;

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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