Equilibrium Dominance often fails to predict well when a Pareto superior sequential equilibrium is also available. Instead, equilibrium selection appears to be related to the potential earnings of a more valuable firm that can signal its type successfully by defecting from the sequential equilibrium. Potential investors formulate their bids for equity based primarily on expectations formed adaptively in response to signaling choices made by firms. Experimental Financial Markets . Forthcoming, Canadian Public Policy .
Economists believe that markets are efficient aggregators of information.
The 1993 UBC Election Stock Market was designed to use this ability to predict the outcome of the 1993 Canadian federal election. The final market predictions were closer to the final results than the final polls . The market also generated a large body of data on the standings of the parties at every point in time during the campaign. This paper makes use of some of these data to study two sets of questions about trader behavior of general interest. An Intertemporal Model of Industrial Exit , The Quarterly Journal of Economics , Vol. 103, No. 2.