On insider trading and belief evolution

Thomas Gehrig, Werner Güth () and René Levínský ()

Journal of Evolutionary Economics, 2013, vol. 23, issue 4, 767-781

Abstract: In a market with stochastic demand with seller competition at most one seller can acquire costly information about demand. Other sellers entertain idiosyncratic beliefs about the market demand and the probability that an informed seller is trading in the market. These idiosyncratic beliefs co-evolve with the potential insider’s inclination to acquire information.True demand expectations (in the Bayesian sense) 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 both strategic substitutes and complements. Whether one observes an insider, in the long run, depends on information costs. For strategic substitutes insider activity benefits the whole population whereas the uninformed sellers could gain even more than the insider. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Evolution of beliefs; Inside information; Heterogeneous markets; Information sharing; C79; D43; D82 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s00191-013-0321-9

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