Uncertainty about Informed Trading in Dealer Markets - An Experiment"

We use an economic experiment to examine the impact of an uncertain level of asymmetric information on the behavior of security dealers. Specifically, we distinguish three types of uncertainty with respect to informed trading - risk, compound risk, and ambiguity - for both a monopoly and a duopoly market setting. We find no difference in dealers' bidding behavior between compound risk and ambiguity. At the same time, we find that bidding behavior is more aggressive under risk than under compound risk or ambiguity. In addition, we find that stochastic models of choice does well in explaining the observed differences in market outcomes for both individual (monopoly) and strategic (duopoly) settings.