Persistent Private Information in Experimental Asset Markets

ABSTRACT This study evaluates the extent to which laboratory markets disseminate private information about the long‐run payout of durable assets, and how persistent private information affects traders' beliefs about future asset prices. Subjects trade dividend‐paying assets, which are redeemed for a randomly determined value that is revealed in advance to “informed traders.” The efficient market hypothesis predicts prices will incorporate private information, which precludes bubbles. Markets exhibit price bubbles in all treatments, with magnitudes that are uncorrelated with the proportion of informed traders. But these price surges do not permit informed traders to earn more than uninformed traders on average. Price predictions are elicited, and informed traders tend to make lower predictions.