While a simple information market lets one trade on the probability of each value of a single variable, a full combinatorial information market lets one trade on any combination of values of a set of variables, including any conditional or joint probability. In laboratory experiments, we compare the accuracy of simple markets, two kinds of combinatorial markets, a call market and a market maker, isolated individuals who report to a scoring rule, and two ways to combine those individual reports into (...) a group prediction. We consider two environments with asymmetric information on sparsely correlated binary variables, one with three subjects and three variables, and the other with six subjects and eight variables (and so 256 states). (shrink)

Prediction markets are low volume speculative markets whose prices offer informative forecasts on particular policy topics. Observers worry that traders may attempt to mislead decision makers by manipulating prices. We adapt a Kyle-style market microstructure model to this case, adding a manipulator with an additional quadratic preference regarding the price. In this model, when other traders are uncertain about the manipulator’s target price, the mean target price has no effect on prices, and increases in the variance of the target price (...) can increase average price accuracy, by increasing the returns to informed trading and thereby incentives for traders to become informed. (shrink)

Department of Economics, George Mason University, MSN 1D3, Carow Hall, Fairfax VA 22030, USA E-mail: [email protected] (http://hanson.gmu.edu).