Parimutuel versus Fixed-Odds Markets

This paper compares the outcomes of parimutuel and competitive fixed-odds betting markets. In the model, there is a fraction of privately informed bettors that maximize expected monetary payoffs. For each market structure, the symmetric equilibria are characterized. In parimutuel betting, the return on longshots is driven to zero as the number of insiders grows large. In fixed odds betting instead, this return is bounded below. Conversely, the expected return on longshots is increasing in the number of insiders in the parimutuel market, but decreasing in the fixed-odds market. The extent of the favorite-longshot bias is shown to depend on the market rules