Bubbles and Information: An Experiment

We study whether information about imminent future dividends can abate bubbles in experimental asset markets. Using the seminal design of Smith et al. (1988) we find that markets where traders are asymmetrically informed about future dividends have smaller, and shorter, bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices – implying higher market efficiency – when some traders know more than others about the future prospects of an asset. We also find that asymmetric information has a similar abating impact on bubbles as when uninformed traders accumulate experience, though for different reasons. This version: 13 September 2008 * We thank Martin Dufwenberg for very helpful comments and Michael Brandner and Thomas Stöckl for excellent research assistance. Financial support from the Center of Experimental Economics at the University of Innsbruck (sponsored by Raiffeisen-Landesbank Tirol) and the Austrian National Bank (grant 12789) is gratefully acknowledged. # Address for correspondence. University of Innsbruck, Department of Public Finance, Universitaetsstrasse 15, A-6020 Innsbruck, Austria. e-mail: [email protected] 1