Working Papers
Identifying Confirmatory Bias in the Field: A Regression-Discontinuity Approach
(with Rodney J. Andrews and Michael J. Sinkey)
Abstract: Models of confirmatory bias predict that perceptions will change discontinuously at the point where signals change from being weakly negative to weakly positive. Using this insight, we develop a novel regression-discontinuity approach to identify confirmatory bias in a real-world setting. In the Associated Press Top 25 College Football Poll, pollsters are tasked with assessing team quality, and their beliefs are treated week-to-week with game results that serve as signals about an individual team's quality. We exploit the variation provided by actual game results relative to market expectations to identify the effect of confirmatory bias on announced perceptions of quality. We construct a unique dataset that matches more than twenty years of individual game characteristics to poll results and betting market information, and show that teams that slightly exceed and barely miss market expectations are exchangeable. The likelihood of winning the game, the average number of points scored by teams and their opponents, and even the average week of the season are no different between teams that slightly exceed and barley miss market expectations. Voters, however, significantly upgrade their beliefs about a team's quality when a team slightly exceeds market expectations. The effects are sizeable-- nearly half of the voters in the poll rank a team one slot higher when they slightly exceed market expectations; one-fifth of the standard deviation in poll points in a given week can be attributed to confirmatory bias. This type of updating suggests that pollsters pay keen attention to the betting market, and we show that it is consistent with confirmatory bias.
Moveable Feasts: A New Approach to Endogenizing Tastes
(with Paul Rhode)
Abstract: We provide a new empirical approach to endogenizing tastes in consumer demand. We argue that tastes can be understood as the result of utility maximizing behavior in the past, whose properties can be used to partially endogenize tastes. As the old maximization problem depends critically on relative prices, we use old relative prices to endogenize tastes, overcoming many of the empirical criticisms of the taste formation literature while at the same time being consistent with a broad class of existing theoretical approaches to taste and preference formation. To test the empirical implications of our approach, we estimate the demand for food using unique household consumption and price data from the nineteenth century. We use contemporaneous relative prices and old relative prices from the home countries of immigrants measured fifteen years prior to our consumption survey. We first establish that the old relative prices are uncorrelated with the contemporaneous relative prices. We then find that older relative prices have a large and significant effect on the demand for food. On average, a one standard deviation in the old relative price changes the current food budgetshare by .2 standard deviations. We also provide suggestive evidence of persistence—the effect of old relative prices on demand persists more than 40 years later. We conclude by noting how our empirical strategy can be used to parameterize changes in tastes in both microeconomic and macroeconomic contexts.
Does the Hot Hand Drive the Market? Evidence from Betting Markets
(with Michael J. Sinkey)
Abstract: This paper investigates how market makers respond to behavioral strategies and the implications of these responses for market efficiency. In particular, we ask whether market makers rationally price out certain strategies at the expense of leaving other strategies profitable, resulting in potential market inefficiency. We answer this question by testing for betting market efficiency in an amateur sport, American college football, using data from over 11,000 games from 1985 to 2003. We find that the market is inefficient; favorites are statistically overpriced while home teams are statistically underpriced. We show that the magnitude of this bias is large enough to generate both economic and statistical inefficiency in this betting market. Furthermore, we provide suggestive evidence for the cause of this inefficiency: betting houses deliberately inflate the betting lines in order to counteract bettors' ``hot hand'' beliefs. While eliminating the ``hot hand'' bias is efficient for a betting house, tempering the ``hot hand'' results in consistently profitable simple betting strategies.
Face Value: Information and Signaling in an Illegal Market
(with Manisha Shah)
NBER Working Paper No. 14841
Abstract: Economists argue that rich information environments and formal enforcement of contracts are necessary to prevent market failures when information asymmetries exist. We test for the necessity of formal enforcement to overcome the problems of asymmetric information by estimating the value of information in an illegal market with a particularly rich information structure: the online market for male sex work. We assemble a rich dataset from the largest and most comprehensive online male sex worker website to estimate the effect of information on pricing. We show how clients of male sex workers informally police the market in a way that makes signaling credible. Using our institutional knowledge, we also identify the specific signal male sex workers use to communicate quality to clients: face pictures. We find that the premium to information is large and that it is due entirely to face pictures. More importantly, the premium is in the range of premiums to information estimated for legal markets. We also show that the evidence is inconsistent with alternative explanations such as beauty premiums. The findings provide novel evidence on the ability of rich information environments to overcome the problems of asymmetric information without formal enforcement, and show that the value of information in illegal markets is similar to its value in legal markets.
On the Heterogeneity of Dowry Motives
(with Raj Arunachalam)
Revised Version of NBER Working Paper No. 12630
Abstract: Dowries have been modeled as pre-mortem bequests to daughters or as groom-prices paid to inlaws. These two classes of models yield mutually exclusive predictions, but empirical tests of these predictions have been mixed. We argue that the heterogeneity of findings can be explained by a heterogeneous world—some households use dowries as a bequest and others use dowries as a price. We estimate a model with heterogeneous dowry motives and use the predictions from the competing theories in an exogenous switching regression to place households in the price or bequest regime. Our empirical strategy generates multiple, independent checks on the validity of regime assignment. Using retrospective marriage data from rural Bangladesh, we find robust evidence of heterogeneity in dowry motives in the population; that bequest dowries have declined in prevalence and amount over time; and that bequest households are better off compared to price households on a variety of welfare measures.
Is there Dowry Inflation in South Asia?
(with Raj Arunachalam)
NBER Working Paper No. 13905
Abstract: This paper is the first systematic attempt to measure the existence and degree of dowry inflation in South Asia. The popular press and scholarly literature have assumed dowry inflation in South Asia for some time, and there are now a number of theoretical papers that have attempted to explain the rise of dowries in South Asia. Despite these advances, there has been no systematic study of dowry inflation. Using large-sample retrospective survey data from India, Bangladesh, Pakistan, and Nepal, we assess the empirical evidence for dowry infllation. We find no evidence that real dowry amounts have systematically increased over time in South Asia.
On Family Allocation Strategy in the Late Nineteenth Century
Abstract: I analyze the intrahousehold allocation of resources among nineteenth century industrial families. The narrative record and economic theory suggest that we should find allocation differences by gender. Using a large survey of industrial households in the late nineteenth century, I find no evidence of gender bias in household allocations to children, nor can I reject the hypothesis that allocations were efficient. These findings cannot be explained by parental egalitarianism. I find that parents were strategic out of necessity—the future cooperation of children was unknown and highly uncertain, tempering any desire for gender bias in household allocations. Narrative and quantitative evidence supports this conclusion.