Uncertainty about Informed Trading in Dealer Markets - An Experiment∗

We use an economic experiment to examine the impact of an uncertain level of asymmetric information on the behavior of security dealers. Specifically, we distinguish three types of uncertainty with respect to informed trading risk, compound risk, and ambiguity for both a monopoly and a duopoly market setting. We find that dealers’ bidding behavior is less aggressive under ambiguity and compound risk than under a risk. Additionally, we find that stochastic models of choice do well in explaining the observed difference in market outcomes for both individual (monopoly) and strategic (duopoly) settings.