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 ...
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.
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