Information Aggregation and Manipulation in an Experimental Market

Prediction markets are increasingly being considered as methods for gathering, summarizing and aggregating diffuse information by governments and businesses alike. Critics worry that these markets are susceptible to price manipulation by agents who wish to distort decision making. We study the effect of manipulators on an experimental market, and find that manipulators are unable to distort price accuracy. Subjects without manipulation incentives compensate for the bias in offers from manipulators by setting a different threshold at which they are willing to accept trades. ∗The authors thank Manuela Abbate for research assistance and an anonymous referee for helpful comments. We gratefully acknowledge the financial support of the International Foundation for Research in Experimental Economics.