Parimutuel versus fixed-odds markets

This paper compares the outcomes of parimutuel and competitive …xed-odds betting markets. In the model, there is a fraction of privately informed bettors that maximize expected monetary payo¤s. 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 …xed 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 …xed-odds market. The market structure also a¤ects the sign of the comparative statics predictions on the favorite-longshot bias. Keywords: Parimutuel betting, …xed-odds betting, favorite-longshot bias, private information. JEL Classi…cation: D82 (Asymmetric and Private Information), D84 (Expectations; Speculations), G13 (Contingent Pricing; Futures Pricing). Economics Subject Area, London Business School, Sussex Place, Regent’s Park, London NW1 4SA, England. Phone: +44-20-7262-5050 ext. 3778. Fax: +44-20-7402-0718. E-mail: mottaviani@london.edu. Web: http://faculty.london.edu/mottaviani. yInstitute of Economics, University of Copenhagen, Studiestræde 6, DK–1455 Copenhagen K, Denmark. Phone: +45–3532–3056. Fax: +45–3532–3000. E-mail: peter.sorensen@econ.ku.dk. Web: http://www.econ.ku.dk/sorensen.