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Experimental asset markets with endogenous choice of costly asymmetric information

Published online by Cambridge University Press:  14 March 2025

Jürgen Huber ,
Martin Angerer  and
Michael Kirchler
Jürgen Huber*
Affiliation:
Department of Banking and Finance, University of Innsbruck, Universitätsstrasse 15, 6020 Innsbruck, Austria
Martin Angerer*
Affiliation:
Department of Banking and Finance, University of Innsbruck, Universitätsstrasse 15, 6020 Innsbruck, Austria
Michael Kirchler*
Affiliation:
Department of Banking and Finance, University of Innsbruck, Universitätsstrasse 15, 6020 Innsbruck, Austria Centre for Finance, University of Gothenburg, Box 640, 40530 Gothenburg, Sweden
*
e-mail: juergen.huber@uibk.ac.at
e-mail: martin.angerer@uibk.ac.at
e-mail: michael.kirchler@uibk.ac.at
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Abstract

Asymmetric distribution of information, while omnipresent in real markets, is rarely considered in experimental financial markets. We present results from experiments where subjects endogenously choose between five information levels (four of them costly). We find that (i) uninformed traders earn the highest net returns, while average informed traders always perform worst even when information costs are not considered; (ii) over time traders learn to pick the most advantageous information levels (full information or no information); and (iii) market efficiency decreases with higher information costs. These results are mostly in line with the theoretical predictions of Grossman and Stiglitz (Am. Econ. Rev. 70:393-408, 1980) and provide additional insights that studies with only two information levels cannot deliver.

Keywords

Information costsAsset marketsExperimentValue of informationAsymmetric information

JEL classification

C91: Laboratory, Individual Behavior G1: General Financial Markets D82: Asymmetric and Private Information • Mechanism Design

Information

Type
Research Article
Information
Experimental Economics , Volume 14 , Issue 2 , May 2011 , pp. 223 - 240
Copyright
Copyright © Economic Science Association 2010

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Footnotes

We thank participants of MAFIN 2009 in Reykjavik, ESA 2010 in Copenhagen, Experimental Finance 2010 in Gothenburg, two anonymous referees, the editor Jacob Goeree, Michael Hanke, and Thomas Stöckl for very helpful comments on earlier versions of this paper. Financial support by the University of Innsbruck and the Austrian National Bank (OeNB-grant 12789) is gratefully acknowledged.

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