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On the Co-evolution of Insider Information and Idiosyncratic Beliefs

Author

Listed:
  • Thomas Gehrig

    (Institut zur Erforschung der wirtschaftlichen Entwicklung, Albert-Ludwigs-Universität)

  • Werner Gueth

    (Max Planck Institute of Economics)

  • Rene Levinsky

    () (Max Planck Institute of Economics)

Abstract

In a market with stochastic demand 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 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.

Suggested Citation

  • Thomas Gehrig & Werner Gueth & Rene Levinsky, 2007. "On the Co-evolution of Insider Information and Idiosyncratic Beliefs," Jena Economic Research Papers 2007-068, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2007-068
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    More about this item

    Keywords

    co-evolution of idiosyncratic beliefs; inside information; heterogeneous markets; information sharing.;

    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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