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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

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    More about this item

    Keywords

    Evolution of beliefs; Inside information; Heterogeneous markets; Information sharing; C79; D43; D82;
    All these keywords.

    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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