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Improving decisions with market information: an experiment on corporate prediction markets

Published online by Cambridge University Press:  14 March 2025

Ahrash Dianat  and
Christoph Siemroth
Ahrash Dianat*
Affiliation:
Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK
Christoph Siemroth*
Affiliation:
Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK
*
[email protected]
[email protected]
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Abstract

We conduct a lab experiment to investigate an important corporate prediction market setting: A manager needs information about the state of a project, which workers have, in order to make a state-dependent decision. Workers can potentially reveal this information by trading in a corporate prediction market. We test two different market designs to determine which provides more information to the manager and leads to better decisions. We also investigate the effect of top-down advice from the market designer to participants on how the prediction market is intended to function. Our results show that the theoretically superior market design performs worse in the lab—in terms of manager decisions—without top-down advice. With advice, manager decisions improve and both market designs perform similarly well, although the theoretically superior market design features less mis-pricing. We provide a behavioral explanation for the failure of the theoretical predictions and discuss implications for corporate prediction markets in the field.

Keywords

Asymmetric informationCorporate prediction marketsLab experimentMarket design

JEL classification

D53: Financial Markets D47: Market Design C92: Laboratory, Group Behavior D82: Asymmetric and Private Information • Mechanism Design
Type
Original Paper
Information
Experimental Economics , Volume 24 , Issue 1 , March 2021 , pp. 143 - 176
Copyright
Copyright © 2021 Economic Science Association

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