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Published or Forthcoming
- Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections
Joint with Justin Wolfers and Eric Zitzewitz
Quarterly Journal of Economics, May 2007, 122(2) 807-829.
Also available as NBER Working Paper #12073
Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2‑3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
Press Reactions:
- Party Influence in Congress and the Economy
Joint with Justin Wolfers and Eric Zitzewitz
Quarterly Journal of Political Science, 2(3): 277-286.
Also available as NBER Working Paper #12751
To understand the extent to which partisan majorities in Congress influence economic policy, we compare financial market responses in recent midterm elections to Presidential elections. We use prediction markets that track election outcomes as a means of precisely timing and calibrating the arrival of news, allowing substantially more precise estimates than a traditional event study methodology. We find that equity values, oil prices, and Treasury yields are slightly higher with Republican majorities in Congress, and that a switch in the majority party in a chamber of Congress has an impact that is only 10-30 percent of that of the Presidency. We also find evidence inconsistent with the popular view that divided government is better for equities, finding instead that equity valuations increase monotonically, albeit slightly, with the degree of Republican control.
Press Reactions:
- Television and the Incumbency Advantage in U.S. Elections
Joint with Stephen Ansolabehere and James M. Snyder
Legislative Studies Quarterly, 31(4): 469-490. (Statistical Appendix)
We use the structure of media markets within states and across state
boundaries to study the relationship between television and electoral
competition. In particular, we compare incumbent vote margins in media
markets where content originates in the same state as media consumers versus
vote margins where content originates out-of-state. This contrast provides a
clear test of whether or not television coverage correlates with the
incumbency advantage. We study U.S. Senate and state gubernatorial races from
the 1950s through the 1990s and find that the effect of TV is small,
directionally indeterminate, and statistically insignificant.
- Unrepresentative Information: The Case of Newspaper Reporting on Campaign Finance
Joint with Stephen Ansolabehere and James M. Snyder
Public Opinion Quarterly,69(2): 213-231.
This paper examines evidence of sampling or statistical bias in
newspaper reporting on campaign finance. We compile all stories from the
five largest circulation newspapers in the United States that mention a
dollar amount for campaign expenditures, contributions, or receipts from
1996 to 2000. We compare these figures to those recorded by the Federal
Election Commission (FEC). The average figures reported in newspapers
exceed the analogous figures from the FEC by as much as eight fold.
Press reports also focus excessively on corporate contributions and soft
money, rather than on the more common types of donors - individual
– and types of contributions - hard money. We further find that
these biases are reflected in public perceptions of money in elections.
Survey respondents overstate the amount of money raised and the share
from different groups by roughly the amount found in newspapers, and
better educated people (those most likely to read newspapers) showed the
greatest discrepancy between their beliefs and the facts.
Book Chapters
- Examining Explanations of a Market Anomaly: Preferences or Perceptions?
Joint with Justin Wolfers
Forthcoming in Handbooks in Finance, William Ziemba and Donald Hausch, Editors
This paper compiles and summarizes the theoretical literature on the favorite-longshot bias, an anomaly has been found in sports betting markets for over half a century. Explanations of this anomaly can be broken down into two broad categories, those involving preferences and those involving perceptions. We propose a novel test of these two classes of model that allows us to discriminate between them without parametric assumptions. We execute these tests on a new dataset, which is an order of magnitude larger than any used in previous studies, and conclude that the perceptions model, in which bettors over-estimate the chances of small probability events, provides a better fit to the data.
- Prediction Markets: From Politics to Business (and Back)
Joint with Justin Wolfers and Eric Zitzewitz
Forthcoming in Handbooks in Finance, William Ziemba and Donald Hausch, Editors
Prediction markets are the subject of a growing body of scholarly literature, and growing attention from the business community. These recent trends are often discussed without reference to the long history of these markets. Prediction markets started as simple wagers on political contests and have expanded through laboratory and field experiments. We survey this history, detailing the past and current uses of prediction markets. We conclude by examining some potential challenges that will need to be addressed as the uses of prediction markets expand.
- Information (In)Efficiency in Prediction Markets
Joint with Justin Wolfers and Eric Zitzewitz
In Information Efficiency in Betting Markets, Leighton Vaughn Williams, Editor. Cambridge University Press, 2005.
We analyze the extent to which simple markets can be used to aggregate
dispersed information into efficient forecasts of unknown future events. From
the examination of case studies in a variety of financial settings we enumerate
and suggest solutions to various pitfalls of these simple markets. Despite
the potential problems, we show that market-generated forecasts are typically
fairly accurate in a variety of prediction contexts, and that they outperform
most moderately sophisticated benchmarks. We also show how conditional
contracts can be used to discover the markets belief about correlations
between events, and how with further assumptions these correlations can be
used to make decisions.
Under Consideration
- A
Multi-Dimensional Signaling Model of Campaign Finance (New Version!)
Joint with Brendan Daley
Earlier version available as SIEPR Discussion Paper 06-027
We develop a dynamic multi-dimensional signaling model of campaign finance in which candidates can signal their ability by enacting policy and/or by raising and spending campaign funds, both of which are costly. Our model departs from the existing literature in that candidates do not need to exchange policy influence for campaign contributions, rather, they must decide how to allocate their efforts between policymaking and fundraising. If high-ability candidates are better policymakers and better fundraisers then they will raise and spend campaign funds even if voters care only about legislation. Voters' inability to reward or punish politicians based on past policy allows fundraising to be used to signal ability at the expense of voter welfare. Campaign finance reform alleviates this phenomenon and improves voter welfare at the expense of politicians. Thus, we expect successful politicians to oppose true campaign finance reform. We also show our model is consistent with findings in the empirical and theoretical campaign finance literature.
- Explaining
the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? (New Version!)
Joint with Justin Wolfers
The favorite-longshot bias presents a challenge for theories of decision making under uncertainty. This longstanding empirical regularity is that betting odds provide biased estimates of the probability of a horse winning--longshots are overbet, while favorites are underbet. Neoclassical explanations focus on rational gamblers who overbet long-shots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories by focusing on the pricing of compound bets. We test whether the models that explain gamblers' choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools. Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory. Along the way we provide more robust evidence on the favorite-longshot bias, falsifying the conventional wisdom that the bias is large enough to yield profit opportunities (it isn't) and that it becomes more severe in the last race (it doesn't).
Press Reactions:
Working Papers
- Cross-Cutting Cleavages and Government Spending
When racial groups differ in terms of their political sensitivity---the propensity of group members to change their vote based on changes in redistribution promised by a candidate---the racial composition of a political jurisdiction affects redistributive policy even when preferences are correlated only with income. Furthermore, the extent to which race and class are cross-cutting is important. Although the concept of cross-cutting cleavages is well-known in political science and sociology, its implications have yet to be analyzed formally. This paper formally defines, develops and tests a model of cross-cutting cleavages to better understand the complex relationships between race, class, preferences, political sensitivity and redistributive policy. I show that the effect of cross-cutting cleavages on redistributive policy depends critically on economic parity---the ratio of average black income to average income. The cross-cutting cleavages model makes six predictions that are all supported by data from large U.S. cities between 1942 and 1972.
Co-author Webpages
Stephen Ansolabehere
Brendan Daley
Gerard Padro-I-Miquel
James M. Snyder, Jr.
Romain Wacziarg
Justin Wolfers
Eric Zitzewitz
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