Inside information in Ponzi schemes

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.