Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs

Abstract

Empirical studies of parimutuel games establish several facts not previously explained by theory. For example, market odds fail to provide accurate predictions of outcomes (Ali, 1979; Dolbear, 1993; Goodwin, 1993) and longshots earn lower expected values than other bets (Ali, 1977; Metzger, 1985). This paper outlines a model of parimutuel games in which such outcomes arise as a consequence of the takeout of the track. Bettors may purchase true probabilities of events, and equilibrium entry and wagers of these informed bettors lead to patterns observed in previous studies. A case study of the Woodlands Greyhound Park supplies evidence consistent with the model.

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