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Do Prediction Markets Aid Defenders in a Weak-Link Contest?

  • Cary Deck

    ()

    (Department of Economics, University of Arkansas and Economic Science Institute, Chapman University)

  • Li Hao

    ()

    (Department of Economics, University of Arkansas)

  • David Porter

    ()

    (Economic Science Institute, Chapman University)

Laboratory experiments have demonstrated that prediction market prices weakly aggregate the disparate information of the traders about states (moves) of nature. However, in many practical applications one might want to predict the move of a strategic participant. This is particularly important in aggressor-defender contests. This paper reports a set of such experiments where the defender may have the advantage of observing a prediction market on the aggressor’s action. The results of the experiments indicate that: the use of prediction markets does not increase the defender’s win rate; prediction markets contain reliable information regarding aggressors’ decisions, namely excess bid information, that is not being exploited by defenders; and the existence of a prediction market alters the behavior of the aggressor whose behavior is being forecast.

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File URL: http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/Do%20Prediction%20Markets%20Aid%20Defenders%20in%20a%20Weak-Link%20Contest.pdf
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Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 13-27.

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Length: 27 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:chu:wpaper:13-27
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