Paper #326

Title:

Reputation and honesty in a market for information

Authors:

Gary Charness and Nuno Garoupa

Date:

September 1998

Abstract:

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.

Keywords:

Asymmetric information, reputation, insider regulation, financial markets, Leex

JEL codes:

C73, C91, D82, G18, K42

Area of Research:

Microeconomics

Published in:

Journal of Economics and Management Strategy, 9, 3, (2000), pp. 425-451

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