(Previous title: Confidence and Overconfidence in Political Economy)

Editorial Summary: Explores, theoretically and empirically, the role of overconfidence in political behavior. Shows that overconfidence is the most important predictor of ideological extremeness, and an important predictor of voter turnout.

Abstract: This paper studies, theoretically and empirically, the role of overconfidence in political behavior. Our model of overconfidence in beliefs predicts that overconfidence leads to ideological extremeness, increased voter turnout, and increased strength of partisan identification. Moreover, the model makes many nuanced predictions about the patterns of ideology in society, and over a person's lifetime. These predictions are tested using unique data that measure the overconfidence, and standard political characteristics, of a nationwide sample of over 3,000 adults. Our predictions, eight in total, find strong support in this data. In particular, we document that overconfidence is a substantively and statistically important predictor of ideological extremeness and voter turnout.

Download: Working paper (July 2013–under review) - NBER Working Paper #19250 - Bibtex

Editorial Summary: Shows, theoretically and empirically, that even if people are only motivated by self-interest, they should, and do, vote based on local economic conditions.

Abstract: We develop an incomplete-information theory of economic voting, where voters' perceptions of macro-economic performance are affected by economic conditions of people similar to themselves. Our theory alleviates two persistent issues in the literature: it shows how egotropic motivations can lead to behavior that appears sociotropic, and why relying exclusively on aggregate data may underestimate the amount of economic voting. We test our theory using both cross-sectional and time series data. We document new stylized facts in aggregate data: state-unemployment is robustly correlated with national economic evaluations and presidential support. A novel survey instrument that asks respondents their numerical assessment of the unemployment rate confirms that individuals' economic perceptions respond to the economic conditions of people similar to themselves. Further, these perceptions associate with individuals' vote choices.

Download: Working paper (Jan 2012–under review) - Bibtex

Editorial Summary: Prediction markets show that the length of the primary season does not affect either parties' eventual probability of victory.

Abstract: To explore the influence of primary and caucus results during the 2008 nomination process we leverage a previously unused methodology---the analysis of prediction market contracts. The unique structure of prediction markets allows us to address two questions. First, we analyze whether primary and caucus results affect candidates' chances in the general election, as candidates who take extreme positions during the nomination contest may be unable to easily appeal to centrist voters in the general election. We also assess whether states with early primaries, such as Iowa and New Hampshire, have a disproportionate effect on the nominating process. We show that the length of the primary process has a minimal impact of the electability of candidates in the general election, and that some states have a disproportionate impact on the nominating process. However, the states that have the largest impact are not necessarily New Hampshire and Iowa, the two that have often been assumed to be the most influential because of their early position on the primary calendar.

Download: Shirking paper (2009?) - Bibtex

Editorial Summary: Although a party can get any legislation passed by threatening its legislators, it will chose to reward them instead if the party cares about staying in power.

Abstract: This paper proposes a dual-utility theory of parties in a legislature. In this theory a legislator has preferences over both actions and policy outcomes. Specifically, a legislator's utility is determined by position taking---his own votes---and by partisan utility which depends on policy implemented by the legislature. Party leaders design mechanisms that make legislators better off by co-ordinating votes and compensating those legislators that vote against the interests of their constituents. The model produces two main findings. First, party leaders are more likely to use promises of rewards and threats of punishment as the size of the party or the benefit of passing the party's policy platform increases. Secondly, and perhaps counter-intuitively, party leaders become less likely to use rewards and punishments when the number of centrist legislators increases, or the costs to centrist legislators increase.

Download: Shirking paper (May, 2008) - Bibtex

Editorial Summary: If you are testing a theory about numbers with a survey, you should ask about numbers. Here's how.

Abstract: Survey questions about economic quantities offer a number of advantages over the qualitative questions generally used to study economic voting. However, concerns about survey respondents' ability to accurately report numbers have limited the use of quantitative questions. This paper shows quantitative questions are feasible and useful for the study of economic voting. First, survey respondents are capable of accurately assessing familiar economic quantities, such as the price of gas. Second, careful question design, in particular proper framing, can reduce measurement error due to respondents not understanding numeric scales when assessing less familiar quantities, such as the unemployment rate. Third, combining quantitative and qualitative questions sheds light on where partisan bias enters economic assessments: in perceiving, judging, or reporting economic quantities. The evidence indicates bias enters the reporting of assessments, and that this bias is smaller in quantitative questions than qualitative questions.

Download: Published Paper - Online Appendix - Final working paper (Nov, 2012) - Bibtex

Editorial Summary: Using a mechanism design approach to RCTs creates deeper understanding and more creative designs.

Abstract: We study the design of randomized controlled experiments in environments where outcomes are significantly affected by unobserved effort decisions taken by the subjects (agents). While standard randomized controlled trials (RCTs) are internally consistent, the unobservability of effort provision compromises external validity. We approach trial design as a principal-agent problem and show that natural extensions of RCTs---which we call selective trials---can help improve the external validity of experiments. In particular, selective trials can disentangle the effects of treatment, effort, and the interaction of treatment and effort. Moreover, they can help experimenters identify when measured treatment effects are affected by erroneous beliefs and inappropriate effort provision.

Download: Published Paper - Final working paper (July, 2011) - NBER Working Paper #16343 - Bibtex

Editorial Summary: Even strong parties are limited in how much they can discipline politicians by the need to win elections.

Abstract: We develop a model of electoral accountability with primaries. Prior to the general election, the supporters of each of two parties decide which candidates to nominate. We show that supporters suffer from a fundamental tension: while they want politicians who will faithfully implement the party's agenda in office, they need politicians who can win elections. Accountability to supporters fails when supporters fear that by punishing or rewarding their incumbent for her loyalty or lack thereof, they unintendedly increase the electoral prospects of the opposing party. Therefore, accountability decreases with the importance that supporters assign to the elections, and it breaks down in two cases. First, a popular incumbent safely defects as she knows she will be re-nominated. Second, an unpopular incumbent defects because she knows she will be dismissed even if she follows the party line. These behaviors are labeled impunity and damnation respectively, and are illustrated with case studies.

Download: Published Paper - Final working paper (April, 2010) - Bibtex

Editorial Summary: Even if campaign funds only convey information about the quality of politicians, voters would be better off with strict regulation of campaign finance.

Abstract: 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. 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.

Download: Published Paper - Final working paper (Feb, 2009) - SIEPR Discussion Paper 06-027 - Bibtex

Editorial Summary: Gambling behavior is often rationalized by risk-loving behavior, which limits the external validity of studies of gambling. If, on the other hand, gambling is due to mis-perceptions of probabilities, the results of these studies are more generally useful.

Abstract: The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning—longshots are overbet, while favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet longshots 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 assessing 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.

Download: Published Paper - Final working paper (Nov, 2007) - NBER Working Paper #15923 - Bibtex

Editorial Summary: The ability of groups of people to make predictions is a potent research tool that should be freed of unnecessary government restrictions.

Download: Published Paper - Bibtex

Editorial Summary: Parties either have little influence in Congress, or Congress has little impact on the economy.

Abstract: 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.

Download: Published Paper - Final working paper (May, 2007) - NBER Working Paper #12751 - Bibtex

Editorial Summary: The effect of politics on markets in the US is quite small.

Abstract: 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.

Download: Published Paper - Final working paper (June, 2006) - NBER Working Paper #12073 - Bibtex

Editorial Summary: TV didn't contribute to the rise in the incumbency advantage.

Abstract: 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.

Download: Published Paper - Online Appendix - Final working paper (Aug, 2005) - Bibtex

Editorial Summary: Media bias makes better read citizens less informed.

Abstract: 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.

Download: Published Paper - Final working paper (Mar, 2005) - Bibtex

Editorial Summary: A review of the substantive contributions made by researchers studying prediction markets.

Abstract: Prediction markets—markets used to forecast future events—have been used to accurately forecast the outcome of political contests, sporting events, and, occasionally, economic outcomes. This chapter summarizes the latest research on prediction markets in order to further their utilization by economic forecasters. We show that prediction markets have a number of attractive features: they quickly incorporate new information, are largely efficient, and impervious to manipulation. Moreover, markets generally exhibit lower statistical errors than professional forecasters and polls. Finally, we show how markets can be used to both uncover the economic model behind forecasts, as well as test existing economic models.

Download: Final working paper (June, 2012) - NBER Working Paper #18222 - Bibtex

Editorial Summary: The only way for event studies to reach their potential is to include a prediction market (in most cases).

Abstract: Event studies have been used to address a variety of political questions—from the economic effects of party control of government to the importance of complex rules in congressional committees. However, the results of event studies are notoriously sensitive to both choices made by researchers and external events. Specifically, event studies will generally produce different results depending on three interrelated things: which event window is chosen, the prior probability assigned to an event at the beginning of the event window, and the presence or absence of other events during the event window. In this paper we show how each of these may bias the results of event studies, and how prediction markets can mitigate these biases.

Download: Final working paper (July, 2010) - NBER Working Paper #16949 - Bibtex

Editorial Summary: This is just a summary of some questions we put on the 2006 ANES.

Abstract: The literature on economic voting does describe how voters acquire information about the general state of the economy, and how that information is used to form perceptions. In order to begin understanding this process, we asked a series of questions on the 2006 ANES Pilot about respondents' perceptions of the average price of gas and the unemployment rate in their home state. We find that questions about gas prices and unemployment show differences in the sources of information about these two economic variables. Information about unemployment rates come from media sources, and are systematically biased by partisan factors. Information about gas prices, in contrast, comes only from everyday experiences. While information about both indicators show effects from demographics, only unemployment rates affect a respondent's political outlook. Moreover, perceptions of unemployment rates can be used to isolate the effect of economics on partisan preferences.

Download: Final working paper (July, 2008) - Bibtex

Editorial Summary: An extensive review of the favorite-longshot literature that divides theories into preferences-based or perception-based explanations.

Abstract: 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.

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Editorial Summary: Details the intellectual history of prediction markets.

Abstract: 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.

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Editorial Summary: Describes what makes prediction markets work, and shows, through example, how the absence of certain factors lead to prediction failure.

Abstract: 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.

Download: Bibtex