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Parimutuel Betting under Asymmetric Information

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  • Frederic Koessler
  • Anthony Ziegelmeyer

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Abstract

This paper examines finite parimutuel betting games with asymmetric information, with particular attention to differences between sequential and simultaneous settings, and between fully rational and myopic ("price taking") behavior. In the simultaneous parimutuel market, all (symmetric and asymmetric) Bayesian-Nash equilibria are generically characterized depending on the number of bettors and the quality of their private information. There always exists a separating equilibrium, where all bettors follow their private signal. This equilibrium becomes unique as the number of bettors increases, and it corresponds to the strategy profile used by myopic bettors. In the sequential framework, the perfectly revealing equilibrium disappears as the number of betting periods increases, whether or not bettors fully anticipate their impact on future odds. In both cases (rational and myopic betting), due to the interaction between information externalities generated by observational learning and payoff externalities generated by betting odds, bettors arbitrate between following their private signal, following the choices of previous bettors, and betting against the trend. Extreme effects based on herd behavior occur in identifiable states of the world, leading to significant short run mispricing.

Suggested Citation

  • Frederic Koessler & Anthony Ziegelmeyer, 2004. "Parimutuel Betting under Asymmetric Information," Papers on Strategic Interaction 2003-34, Max Planck Institute of Economics, Strategic Interaction Group.
  • Handle: RePEc:esi:discus:2003-34
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    References listed on IDEAS

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    4. Eyster, Erik & Galeotti, Andrea & Kartik, Navin & Rabin, Matthew, 2014. "Congested observational learning," Games and Economic Behavior, Elsevier, vol. 87(C), pages 519-538.
    5. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Jena Economic Research Papers 2007-033, Friedrich-Schiller-University Jena.
    6. Koessler, Frédéric & Noussair, Charles & Ziegelmeyer, Anthony, 2008. "Parimutuel betting under asymmetric information," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 733-744, July.
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    8. Lambert, Nicolas S. & Langford, John & Wortman Vaughan, Jennifer & Chen, Yiling & Reeves, Daniel M. & Shoham, Yoav & Pennock, David M., 2015. "An axiomatic characterization of wagering mechanisms," Journal of Economic Theory, Elsevier, vol. 156(C), pages 389-416.
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    13. Ottaviani, Marco & Sørensen, Peter Norman, 2003. "Late Informed Betting and the Favourite-Longshot Bias," CEPR Discussion Papers 4092, C.E.P.R. Discussion Papers.
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    16. Linardi, Sera, 2017. "Accounting for noise in the microfoundations of information aggregation," Games and Economic Behavior, Elsevier, vol. 101(C), pages 334-353.
    17. Frederic Koessler & Ch. Noussair & A. Ziegelmeyer, 2005. "Individual Behavior and Beliefs in Experimental Parimutuel Betting Markets," THEMA Working Papers 2005-08, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    18. Giovanni Dosi & Patrick Llerena & Mauro Sylos Labini, 2005. "Science-Technology-Industry Links and the ”European Paradox”: Some Notes on the Dynamics of Scientific and Technological Research in Europe," LEM Papers Series 2005/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    19. Koessler, Frédéric & Noussair, Charles & Ziegelmeyer, Anthony, 2012. "Information aggregation and belief elicitation in experimental parimutuel betting markets," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 195-208.
    20. Stéphane Betrand & Kene Boun My & Alban Verchère, 2005. "Faire émerger la coopération internationale : une approche expérimentale comparée du bilatéralisme et du multilatéralisme," Working Papers of BETA 2005-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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