On the Co-evolution of Insider Information and Idiosyncratic Beliefs

Thomas Gehrig, Werner Gueth and René Levínský ()
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Werner Gueth: Max Planck Institute of Economics
Authors registered in the RePEc Author Service: Werner Güth ()

No 2007-068, Jena Economics Research Papers from Friedrich-Schiller-University Jena

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 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 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.

Keywords: co-evolution of idiosyncratic beliefs; inside information; heterogeneous markets; information sharing. (search for similar items in EconPapers)
JEL-codes: C79 D43 D82 (search for similar items in EconPapers)
Date: 2007-09-21
New Economics Papers: this item is included in nep-cbe
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Persistent link: https://EconPapers.repec.org/RePEc:jrp:jrpwrp:2007-068

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