Experimental Asset Markets with Endogenous Choice of Costly Heterogeneous Information

Abstract:     
Building on Grossman and Stiglitz (1980) and Sunder (1992) we present results from experimental asset markets where subjects endogenously choose between five information levels. Depending on the specific treatment either the costs of information or the maximum number of subjects with each information level is fixed. We find mostly supporting evidence for the conjectures of Grossman and Stiglitz (1980) and the results of Sunder (1992). More importantly, we observe that the relationship between information level and gross returns is not linear, but J-shaped. Looking at net returns after information costs, the uninformed have the highest net returns in each treatment, while informed traders are not able to recover their information costs.

Number of Pages in PDF File: 43

Keywords: Costly information, asset markets, experiment, value of information, heterogeneous information

JEL Classification: C91, D82, G1

working papers series