Reputation and Honesty in a Market for Information

Universitat Pompeu Fabra Economics Working Paper No. 326

36 Pages Posted: 30 Nov 1998

See all articles by Gary Charness

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Nuno Garoupa

George Mason University - Antonin Scalia Law School, Faculty

Abstract

Previous works on asymmetric information in asset markets tend to focus on the potential gains in the asset market itself. We focus on the market for information and conduct an experimental study to explore, in a game of finite but uncertain duration, whether reputation can be an effective constraint on deliberate misinformation. At the beginning of each period, an uninformed potential asset buyer can purchase information, at a fixed price and from a fully-informed source, about the value of the asset in that period. The informational insiders cannot purchase the asset and are given short-term incentives to provide false information when the asset value is low. Our model predicts that, in accordance with the Folk Theorem, Pareto-superior outcomes featuring truthful revelation should be sustainable. However, this depends critically on beliefs about rationality and behavior. We find that, overall, sellers are truthful 89% of the time. More significantly, the observed frequency of truthfulness is 81% when the asset value is low. Our result is consistent with both mixed-strategy and trigger strategy interpretations and provides evidence that most subjects correctly anticipate rational behavior. We discuss applications to financial markets, media regulation, and the stability of cartels.

JEL Classification: C73, C91, D82, G18, K42

Suggested Citation

Charness, Gary and Garoupa, Nuno, Reputation and Honesty in a Market for Information. Universitat Pompeu Fabra Economics Working Paper No. 326. Available at SSRN: https://ssrn.com/abstract=139695 or http://dx.doi.org/10.2139/ssrn.139695

Gary Charness (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

Nuno Garoupa

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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