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Reputation, Honesty, and Efficiency with Insider Information: an Experiment

Gary Charness () and Nuno Garoupa ()

Journal of Economics & Management Strategy, 2000, vol. 9, issue 3, 425-451

Abstract: We conduct an experimental study of sales of insider information about an asset's future value, where the insiders cannot purchase the underlying asset. We examine whether such information is purchased, the quality of the information provided, and the subsequent accuracy of purchase decisions in the underlying asset market. Our design explores whether reputation, in a repeated game of finite (but uncertain) duration, is an effective constraint on deliberate strategic misinformation. The insiders have an immediate incentive to state that the asset value is high when its true value is low. We suggest an application to insider trading in financial information markets. With fixed matching, cooperative outcomes featuring truthful revelation are frequently achieved and sustained, even though this suggests subjects have sophisticated beliefs about the beliefs and behavior of others. As a comparison, we also conduct a control treatment with random rematching. Here, information purchase is less frequent, the rate of truthful revelation decreases, and efficiency is diminished. Our results suggest that most people anticipate that others realize the potential value of a good reputation.

Date: 2000
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Handle: RePEc:bla:jemstr:v:9:y:2000:i:3:p:425-451