On the Co-evolution of Insider Informationand Idiosyncratic Beliefs

In a market with stochastic demand at most one seller can acquire costly informationabout demand. Other sellers entertain idiosyncratic beliefs about the marketdemand and the probability that an informed seller is trading in the market. Theseidiosyncratic beliefs co-evolve with the potential insider’s inclination to acquire information.True demand expectations are not evolutionarily stable when beliefs, via revelation,can be used to commit to more aggressive behavior. The commitment effectfades away in large markets and has the same direction for both strategic substitutesand complements. Whether one observes an insider, in the long run, depends on informationcosts. For strategic substitutes insider activity benefits the whole populationwhereas the uninformed sellers could gain even more than the insider.