Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models

The study reports on the applicability of competing models of market information integration and dissemination in explaining the behavior of simple laboratory, one-period security markets. Returns to the security depended upon a randomly chosen state of nature. Some agents (insiders), whose identity was unknown to other agents, knew the state before the markets opened. With replication of market conditions a model based upon rational expectations principles is relatively accurate. Prices adjusted immediately to near rational expectations prices; profits of insiders were virtually indistinguishable from noninsiders; and efficiency levels converged to near 100 percent.