Information aggregation in Arrow–Debreu markets: an experiment

Lawrence Choo (), Todd Kaplan and Ro'i Zultan

Experimental Economics, 2019, vol. 22, issue 3, No 4, 625-652

Abstract: Abstract Studies of experimental and betting markets have shown that markets are able to efficiently aggregate information dispersed over many traders. We study information aggregation in Arrow–Debreu markets using a novel information structure. Compared to previous studies, the information structure is more complex, allows for heterogeneity in information among traders—which provides insights into the way in which information is gradually disseminated in the market—and generates situations in which all traders hold identical beliefs over the traded assets’ values, thus providing a harsh stress test for belief updating. We find little evidence for information aggregation and dissemination in early rounds. Nonetheless, after traders gain experience with the market mechanism and structure, prices converge to reveal the true state of the world. Elicited post-market beliefs reveal that markets are able to efficiently aggregate dispersed information even if individual traders remain uninformed, consistent with the marginal trader hypothesis.

Keywords: Information aggregation; Prediction markets; Arrow–Debreu markets; Red hat puzzle (search for similar items in EconPapers)
JEL-codes: C90 G14 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Working Paper: Information Aggregation in Arrow-Debreu Markets: An Experiment (2018)
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DOI: 10.1007/s10683-017-9548-x

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