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 ...
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.
