Information Acquisition in Asset Markets: Experimental Investigation of a Matrix Game
Posted: 22 Oct 2000
Date Written: March 1995
Abstract
On a market, the value of private information declines with the number of market participants who acquire this information. This idea, which is also at the basis of GROSSMAN/STIGLITZ (1980), is translated into a simple model. Identical assets are auctioned among bidders. Prior to the auction each bidder can purchase perfect information about the value of the asset. Then he has to make his bid without knowing how many traders have acquired information. We solve this model and obtain closed-form solution for special cases. We then translate the model into a matrix game that has the structure of a Hawk-Dove game. It still captures the basic idea but is simple enough to be tested experimentally. We conduct a series of experiments and find that (a) subjects tend to overinform if the normative solution prescribes to purchase information with low probability and that (b) some subjects specialize on relying on market efficiency while others specialize on gathering information. This division of labor can be sustained as a population equilibrium.
JEL Classification: G14
Suggested Citation: Suggested Citation