On the Co-Evolution of Insider Information and Idiosyncratic Beliefs

17 Pages Posted: 2 Oct 2007

See all articles by Thomas Gehrig

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Vienna Graduate School of Finance (VGSF); Systemic Risk Centre - LSE

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Rene Levinsky

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics

Date Written: September 2007

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 whether there exists an informed seller. 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 for both strategic substitutes and complements. Whether one observes an insider, in the long haul, depends on the information costs. For strategic substitutes insider activity benefits the whole population when it is possible that the uniformed sellers gain more than the insider.

Keywords: co-evolution, idiosyncratic beliefs, inside information, heterogenous markets, information sharing

JEL Classification: C79, D43, D82

Suggested Citation

Gehrig, Thomas and Güth, Werner and Levinsky, Rene, On the Co-Evolution of Insider Information and Idiosyncratic Beliefs (September 2007). Jena Economic Research Paper No. 2007-068. Available at SSRN: https://ssrn.com/abstract=1018046 or http://dx.doi.org/10.2139/ssrn.1018046

Thomas Gehrig (Contact Author)

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom
London

Werner Güth

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Rene Levinsky

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

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