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

Werner Güth

Max Planck Institute for Research on Collective Goods; Luiss Guido Carli University

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 ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Werner Güth

Max Planck Institute for Research on Collective Goods

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

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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