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Parimutuel Betting under Asymmetric Information

  • Frédéric KOESSLER

This paper examines a game-theoretical model of parimutuel betting markets with asymmetric information. Generically, all Bayesian-Nash equilibria of the simultaneous game are characterized depending on the number of bettors and the quality of their private information. An equilibrium where all bettors use their private information always exists and becomes unique as the number of bettors increases. On the contrary, in a sequential framework, a perfectly revealing equilibrium does not always exist and disappears as the number of bettors increases. Bettors arbitrate between following their private signal, following the choices of previous bettors, and betting against the trend. On average,information is well aggregated by the market, but extreme effects based on herd and contrarian behavior occur in identifiable states of the world,leading to significant mispricing.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2002-17.

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Date of creation: 2002
Date of revision:
Handle: RePEc:ulp:sbbeta:2002-17
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  11. Frédéric Koessler & Anthony Ziegelmeyer & Marie-Hélène Broihanne, 2003. "The Favorite-Longshot Bias in Sequential Parimutuel Betting with Non-Expected Utility Players," Theory and Decision, Springer, vol. 54(3), pages 231-248, May.
  12. Frédéric Koessler & Charles Noussair & Anthony Ziegelmeyer, 2012. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00754582, HAL.
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  24. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
  25. 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.
  26. Watanabe, Takahiro & Nonoyama, Hideyuki & Mori, Masao, 1994. "A Model of a General Parimutuel System: Characterizations and Equilibrium Selection," International Journal of Game Theory, Springer, vol. 23(3), pages 237-60.
  27. Takahiro, Watanabe, 1997. "A parimutuel system with two horses and a continuum of bettors," Journal of Mathematical Economics, Elsevier, vol. 28(1), pages 85-100, August.
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