Refereed Publications

Herding and Contrarianism: A Matter of Preference?

Review of Economics and Statistics, conditionally accepted Online Appendix

Herding and contrarian strategies produce informational inefficiencies when investors ignore private information, instead following or bucking past trends. In a simple market model, I show theoretically that investors with prospect theory preferences generically follow strategies that are observationally equivalent to herding or contrarianism, but which are actually trend-independent. I confirm the theory's predictions in a laboratory experiment designed to rule out other sources of these behaviors, and find that approximately half of subjects exhibit herding-like behavior. Finally, I simulate decisions of the modal subject when facing actual market returns to demonstrate that this behavior extends to more general settings.

Unbundling Polarization (with Nathan Canen and Francesco Trebbi)

Econometrica, 2020, 88(3), 1197-1233 Online Appendix

This paper investigates the determinants of political polarization, a phenomenon of increasing relevance in Western democracies. How much of polarization is driven by divergence in the ideologies of politicians? How much is instead the result of changes in the capacity of parties to control their members? We use detailed internal information on party discipline in the context of the U.S. Congress – whip count data for 1977-1986 – to identify and structurally estimate an economic model of legislative activity in which agenda selection, party discipline, and member votes are endogenous. The model delivers estimates of the ideological preferences of politicians, the extent of party control, and allows us to assess the effects of polarization through agenda setting (i.e. which alternatives to a status quo are strategically pursued). We find that parties account for approximately 40 percent of the political polarization in legislative voting over this time period, a critical inflection point in U.S. polarization. We also show that, absent party control, historically significant economic policies would have not passed or lost substantial support. Counterfactual exercises establish that party control is highly relevant for the probability of success of a given bill and that polarization in ideological preferences is more consequential for policy selection, resulting in different bills being pursued.

Market Panics, Frenzies, and Informational Efficiency: Theory and Experiment

American Economic Journal: Microeconomics, 2020, 12(3) 76-115

In a market rush, the fear of future adverse price movements causes traders to trade before they become well-informed, reducing the informational efficiency of the market. I derive theoretical conditions under which market rushes are equilibrium behavior and study how well these conditions organize trading behavior in a laboratory implementation of the model. Market rushes, including both panics and frenzies, occur more frequently when predicted by theory. However, subjects use commonly-discussed, momentum-like strategies that lead to informational losses not predicted by theory, suggesting that these strategies may exacerbate both the occurrence and consequences of panics and frenzies.

The Time Cost of Information in Financial Markets

Journal of Economic Theory, 2018, 176, 118-157 Online Appendix

I model a financial market in which traders acquire private information through time-consuming research. A time cost of information arises due to competition - through the expected adverse price movements due to others' trades - causing traders to rush to trade on weak information. This cost monotonically increases with asset value uncertainty, so that, exactly opposite to the result under the standard modeling assumption of a monetary cost of information, traders acquire the least information when this uncertainty is largest. The model makes several novel testable predictions regarding volume and order imbalances, some of which have existing empirical support.

Are Biased Beliefs Fit to Survive? An Experimental Test of the Market Selection Hypothesis (with Ryan Oprea)

Journal of Economic Theory, 2018, 176, 342-371

We experimentally study the market selection hypothesis, the classical claim that competitive markets bankrupt traders with biased beliefs, allowing unbiased competitors to survive. Prior theoretical work suggests the hypothesis can fail if biased traders over-invest in the market relative to their less biased competitors. Subjects in our experiment divide wealth between consumption and a pair of securities whose values are linked to a difficult reasoning problem. While most subjects in our main treatment form severely biased beliefs and systematically over- consume, the minority who form unbiased beliefs consume at near-optimal levels - an association that strongly supports the market selection hypothesis.

How Do Voters Respond to Information? Evidence from a Randomized Campaign (with Tommaso Nannicini and Francesco Trebbi),

American Economic Review, 2015, 105(1), 322-353 Online appendix

In a large-scale controlled trial in collaboration with the reelection campaign of an Italian incumbent mayor, we administered (randomized) messages about the candidate's valence or ideology. Informational treatments affected both actual votes in the precincts and individual vote declarations. Campaigning on valence brought more votes to the incumbent, but both messages affected voters' beliefs. Cross-learning occurred, as voters who received information about the incumbent also updated their beliefs about his opponent. With a novel protocol of beliefs elicitation and structural estimation, we assess the weights voters place upon politicians' valence and ideology and employ the model to simulate counterfactual campaigns.

Incumbency Advantages in the Canadian Parliament (with Marie Rekkas),

Canadian Journal of Economics , 2012, 45(4), 1560-1585

We apply a regression discontinuity approach to determine incumbency advantages in the Canadian Parliament, finding that incumbents enjoy a 9.4–11.2% increased probability of winning over non-incumbents. Owing to the presence of multiple parties, an incumbency advantage in terms of vote share does not always translate to an increased probability of winning, because incumbents do not necessarily obtain votes from their closest opponent. Also, under the assumption that strategic exit is not an issue, we are able to split the incumbency advantage into party incumbency and individual candidate incumbency components, finding that the advantage is almost entirely due to the individual.