Manipulators Increase Information Market Accuracy

Information markets are low volume markets whose prices offer informative estimates on particular policy topics of interest. Observers have expressed concern that such prices might be less informative due to manipulators, i.e., traders who prefer that we see some policy estimates instead of others. We adapt a Kyle-style market microstructure model to the case of information markets, by assuming risk-neutrality and by allowing information effort and general trader irrationality. We add a trader who has an additional quadratic preference regarding the price, and we make ordinary traders uncertain about this manipulator’s target price. We find that the mean target price has no effect on prices, but that increases in the variance of the target price increase average price accuracy, by increasing the returns to informed trading. ∗For their comments, we thank Bryan Caplan, Dan Houser, John Ledyard, Kevin McCabe, Dave Porter, Emile Servan-Schreiber, Koleman Strumpf, Alex Tabarrok, Eric Zitzewitz, and several anonymous referees. For financial support we thank the Center for Study of Public Choice, the Mercatus Center, and the International Foundation for Research in Experimental Economics. †[email protected],[email protected], MSN 1D3, Carow Hall, Fairfax VA 22030-4444