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Inside information in Ponzi schemes

Author

Listed:
  • Klarita Sadiraj

    (The Netherlands Institute for Social Research (SCP))

  • Arthur Schram

    (CREED, Amsterdam School of Economics
    Robert Schumann Center, European University Institute)

Abstract

Ponzi-like investment schemes were popular in many transition economies. Often, some government officials had inside information about the viability of such schemes and used this information to their own advantage. We introduce a novel experimental design that allows us to study the extent to which this kind of abuse of information is possible and what consequences it has for those without such information. In particular, we investigate how the proportion of informed versus uninformed investors and the promised dividends affect the way in which informed investors can exploit the investments of uninformed investors. Our results show that uninformed investors follow the observed choices of the informed even more than predicted by theory. This adds to the devastating effects that this kind of underground activity can have on the uninformed.

Suggested Citation

  • Klarita Sadiraj & Arthur Schram, 2018. "Inside information in Ponzi schemes," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 4(1), pages 29-45, July.
    • Handle: RePEc:spr:jesaex:v:4:y:2018:i:1:d:10.1007_s40881-018-0047-4
    DOI: 10.1007/s40881-018-0047-4
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    References listed on IDEAS

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    11. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2012. "Contagious Bank Runs: Experimental Evidence," Working Papers on Finance 1207, University of St. Gallen, School of Finance.
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    Cited by:

    1. Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2022. "Experimental bank runs," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 25, pages 347-361, Edward Elgar Publishing.
      • Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2021. "Experimental Bank Runs," ThE Papers 21/03, Department of Economic Theory and Economic History of the University of Granada..
    2. Gönül Doğan & Kenan Kalayci & Priscilla Man, 2024. "Pyramid Schemes," Discussion Papers Series 667, School of Economics, University of Queensland, Australia.

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    More about this item

    Keywords

    Ponzi scheme; Informed investors; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • P - Political Economy and Comparative Economic Systems

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