The Relationship between Public and Private Information : An Experimental Economics Investigation

This study investigates the relationship between public and private information using experimental markets. The level of public disclosure is varied to examine the effect on private information consumption and the informedness of price. The experimental setting consists of a double auction security market and an information market running concurrently. After all traders received public information, the markets commenced and both the informedness of price and the amount spent on private information were determined endogenously. The results indicate that an inverse relation exists between public disclosure and private information consumption and between the informedness of price and private information consumption. The evidence also suggests that the overall informedness of traders increases with increases in the level of public disclosure. These results are consistent with the predictions of Verrecchia (1982a,b). Unlike prior studies, this study finds that, after considering the cost of information, less-informed traders earned considerably more than relatively informed traders and this was consistent over all subject groups, days, and levels of public information