Informational Content of Prices Set Using Excess Demand: The Natural Experiment of Czech Voucher Privatization

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Abstract
The natural experiment of voucher privatization in the Czech Republic is used to test whether prices that were adjusted in a limited number of discrete steps based primarily on the extent of excess demand or supply are able to fully reflect both public and private information. Early in the process, when prices reflected primarily book values determined from communist-era accounts, neither public nor private information was reflected in prices. Such information, however, did affect players’ bids. As the process continued and prices were adjusted in response to excess demand and supply, the market price reflected all available information, both public and private. This finding provides strong evidence supporting the conclusions of previous limited laboratory experiments that markets provide efficient price signals, even in the presence of a large number of both informed and uninformed traders.

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