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TITLE: Markets, Moral Hazard, and Equilibrium Selection

AUTHORS: Shimon Kogan, Anthony Kwasnica and Roberto Weber

ABSTRACT:

We examine the effectiveness of asset markets when the final outcome upon which the asset payout is based may be affected by the unobservable actions of the traders. Players participate in a minimum effort coordination game preceeded by an information market where the asset payoffs are determined by the observed minimum effort level in the subsequent game. We examine both the informativeness of the markets and the effect of the market upon the ultimate outcome in the coordination game. This research provides insights into both equilibrium selection and the application of prediction markets within organizations as a decision support tool.