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Information Aggregation Under Ambiguity: Theory and Experimental Evidence

Galanis, Spyros; Ioannou, Christos A.; Kotronis, Stelios

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Authors

Christos A. Ioannou

Stelios Kotronis



Abstract

We study information aggregation in a dynamic trading model. We show theoretically that separable securities, introduced by Ostrovsky in the context of Expected Utility, no longer aggregate information if some traders have imprecise beliefs and are ambiguity averse. Moreover, these securities are prone to manipulation as the degree of information aggregation can be influenced by the initial price set by the uninformed market maker. These observations are also confirmed in our laboratory experiment using prediction markets. We define a new class of strongly separable securities, which are robust to the above considerations and show that they characterize information aggregation in both strategic and non-strategic environments. We derive several testable predictions, which we are able to confirm in the laboratory. Finally, we show theoretically that strongly separable securities are both sufficient and necessary for information aggregation but, strikingly, there does not exist a security that is strongly separable for all information structures.

Citation

Galanis, S., Ioannou, C. A., & Kotronis, S. (2024). Information Aggregation Under Ambiguity: Theory and Experimental Evidence. The Review of Economic Studies, https://doi.org/10.1093/restud/rdae009

Journal Article Type Article
Acceptance Date Jan 16, 2024
Online Publication Date Jan 24, 2024
Publication Date Jan 24, 2024
Deposit Date Sep 25, 2023
Publicly Available Date May 22, 2024
Journal The Review of Economic Studies
Print ISSN 0034-6527
Electronic ISSN 1467-937X
Publisher Oxford University Press
Peer Reviewed Peer Reviewed
DOI https://doi.org/10.1093/restud/rdae009
Public URL https://durham-repository.worktribe.com/output/1748188

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