Efficiency of Price Setting Based on a Simple Excess Demand Rule : The Natural Experiment of Czech Voucher Privatization

The natural experiment of voucher privatization in the Czech Republic is used to test whether prices that were adjusted in a limited number of discrete steps based primarily on the extent of excess demand or supply are able to fully reflect both public and private information. The eventual market prices are used as a proxy for the underlying true value of the shares in voucher privatization. We find that after two or three price adjustments, public information does not add any predictive power to an equation that uses voucher prices to predict future market prices for all but the smallest shares involved in the process. Similarly, after the early rounds in the process we found that even professional fund managers did not possess private information that enabled them to identify (and bid for) shares that would eventually have greater value than could be predicted from the current voucher prices. Taken as a whole, the results strongly suggest that prices adjusted on the basis of excess demand are able to rapidly incorporate all available information, even when professionals have a strong incentive to attempt to identify and use such information