Markets, Moral Hazard, and Equilibrium Selection [Preliminary Draft- UTDallas Seminar]

We examine the effectiveness of asset markets when the final out-come upon which the asset payout is based maybe 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 equilib-rium selection and the application of prediction markets within orga-nizations as a decision support tool