Improving Decisions With Market Information: An Experiment on Corporate Prediction Markets
Experimental Economics, Forthcoming
54 Pages Posted: 22 Mar 2019 Last revised: 26 Mar 2020
Date Written: February 17, 2020
Abstract
We conduct a lab experiment to investigate an important corporate prediction market setting: A manager needs information about the state of a project, which workers have, in order to make a state-dependent decision. Workers can potentially reveal this information by trading in a corporate prediction market. We test two different market designs to determine which provides more information to the manager and leads to better decisions. We also investigate the effect of top-down advice from the market designer to participants on how the prediction market is intended to function. Our results show that the theoretically superior market design performs worse in the lab---in terms of manager decisions---without top-down advice. With advice, manager decisions improve and both market designs perform similarly well, although the theoretically superior market design features less mis-pricing. We provide a behavioral explanation for the failure of the theoretical predictions and discuss implications for corporate prediction markets in the field.
Keywords: Asymmetric Information, Corporate Prediction Markets, Lab Experiment, Market Design
JEL Classification: C92, D47, D53, D82
Suggested Citation: Suggested Citation