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 amount of insider information in a parimutuel market, but decreasing in a fixed-odds market. The market structure also affects the sign of the comparative statics predictions on the favorite-longshot bias.
Parimutuel versus fixed-odds markets
OTTAVIANI, MARCO M.;
2005
Abstract
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 amount of insider information in a parimutuel market, but decreasing in a fixed-odds market. The market structure also affects the sign of the comparative statics predictions on the favorite-longshot bias.
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