Market Manipulation with Outside Incentives

Much evidence has shown that prediction markets, when used in isolation, can effectively aggregate dispersed information about uncertain future events and produce remarkably accurate forecasts. However, if the market prediction will be used for decision making, a strategic participant with a vested interest in the decision outcome may want to manipulate the market prediction in order to influence the resulting decision. The presence of such incentives outside of the market would seem to damage information aggregation because of the potential distrust among market participants. While this is true under some conditions, we find that, if the existence of such incentives is certain and common knowledge, then in many cases, there exists a separating equilibrium for the market where information is fully aggregated. This equilibrium also maximizes social welfare for convex outside payoff functions. At this equilibrium, the participant with outside incentives makes a costly move to gain the...

• Type: Journal
• Year: 2011
• Where: AAAI
• Authors: Yiling Chen, Xi Alice Gao, Rick Goldstein, Ian A. Kash
• Keywords: AAAI 2011, Information Aggregation, Intelligent Agents, Market Participants, Market Prediction