The Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trade of Money Managers

A mutual-fund manager is more likely to hold (or buy, or sell) a particular stock in any quarter if other managers in the same city are holding (or buying, or selling) that same stock. This pattern shows up even when controlling for the distance between the fund manager and the stock in question, so it is distinct from a local-preference effect. It is also robust to a variety of controls for investment styles. These results can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

Social Interaction and Stock-Market Participation

We investigate the idea that stock-market participation is influenced by social interaction. We build a simple model in which any given 'social' investor finds it more attractive to invest in the market when the participation rate among his peers is higher. The model predicts higher participation rates among social investors than among 'non-socials'. It also admits the possibility of multiple social equilibria. We then test the theory using data from the Health and Retirement Study. Social households - defined as those who interact with their neighbors, or who attend church - are indeed substantially more likely to invest in the stock market than non-social households, controlling for other factors like wealth, race, education and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher.

The Only Game in Town: Stock-Price Consequences of Local Bias

Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. We test this proposition using data on U. S. Census regions and states, and find clear-cut support for it. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density—e. g. , the Deep South—are home to relatively few firms per capita, which leads to higher stock prices via an “only-game-in-town” effect. This effect is especially pronounced for smaller, less visible firms, where the impact of location on stock prices is roughly 12 percent.

Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers

A mutual-fund manager is more likely to hold (or buy, or sell) a particular stock in any quarter if other managers in the same city are holding (or buying, or selling) that same stock. This pattern shows up even when controlling for the distance between the fund manager and the stock in question, so it is distinct from a local-preference effect. It is also robust to a variety of controls for investment styles. These results can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

The Only Game in Town: Stock-Price Consequences of Local Bias

Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. We test this proposition using data on U.S. Census regions and states, and find clear-cut support for it. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density--e.g., the Deep South--are home to relatively few firms per capita, which leads to higher stock prices via an "only-game-in-town" effect. This effect is especially pronounced for smaller, less visible firms, where the impact of location on stock prices is roughly 12 percent.

Disability Insurance Rejection Rates and the Labor Supply of Older Workers

Disability Insurance (DI), which provides income support to disabled workers, has been criticized for inducing a large fall in the labor force participation rate of older workers. We study the effects of one policy response designed to address this moral hazard problem: raising the rate at which DI claims are denied. Initial DI applications are decided at the state level, and, in response to a funding crisis for the DI program in the late 1970s, the states raised their rejection rates for first time applicants by 30% on average. The extent of this rise, however, varied substantially across states. We use this variation to estimate a significant reduction in labor force non-participation among older workers in response to denial rate rises. A 10% increase in denial rates led to a 2.7% fall in non- participation among 45-64 year old males; between 1/2 and 2/3 of this effect is a true reduction in labor force leaving, with the remainder accounted for by the return to work of denied applicants. We find some support for the notion that increases in denial rates effectively target their incentive effects to more able individuals; the fall in labor force non-participation was much stronger among more able workers, according to an anthropometric measure of disability.

Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes

An important issue in public policy analysis is the potential endogeneity of the policies under study. If policy changes constitute responses on the part of political decision-makers to changes in a variable of interest, then standard analyses that treat policy changes as natural experiments may yield biased estimates of the impact of the policy (Besley and Case 2000). We examine the extent to which such political endogeneity biases conventional fixed effects estimates of behavioral parameters by identifying the elasticities of demand for cigarettes and beer using the timing of state legislative elections as an instrument for changes in state excise taxes. In both cases, we find sizable differences between these estimated demand elasticities and the fixed effect estimates cited in Evans, Ringel, and Stech (1999). We conclude that the use of fixed effects estimators in environments where policy interventions are endogenously determined may lead to large biases in the estimated effects of the policies. This paper was revised July 2002

Can Policy Changes Be Treated as Natural Experiments? Evidence from Cigarette Excise Taxes

An important issue in public policy analysis is the potential endogeneity of the policies under study. We examine the extent to which such political endogeneity biases estimates of behavioral parameters by identifying the elasticity of demand for cigarettes using the timing of state legislative elections as an instrument for changes in cigarette excise taxes. We find sizable differences between our estimates and those cited in Chaloupka and Warner (2000), which treat cigarette taxes as exogenous. Our results add to a growing body of evidence that policy changes may be codetermined with the outcomes they are thought to influence

Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes

An important issue in public policy analysis is the potential endogeneity of the policies under study. If policy changes constitute responses on the part of political decision-makers to changes in a variable of interest, then standard analyses that treat policy changes as natural experiments may yield biased estimates of the impact of the policy (Besley and Case 2000). We examine the extent to which such political endogeneity biases conventional fixed effects estimates of behavioral parameters by identifying the elasticities of demand for cigarettes and beer using the timing of state legislative elections as an instrument for changes in state excise taxes. In both cases, we find sizable differences between these estimated demand elasticities and the fixed effect estimates cited in Evans, Ringel, and Stech (1999). We conclude that the use of fixed effects estimators in environments where policy interventions are endogenously determined may lead to large biases in the estimated effects of the policies

Lethal Elections: Gubernatorial Politics and the Timing of Executions

We document the existence of a gubernatorial election cycle in state executions, suggesting that election year political considerations play a role in determining the timing of executions. Our analysis indicates that states are approximately 25 percent more likely to conduct executions in gubernatorial election years than in other years. We also find that elections have a larger effect on the probability that an African American defendant will be executed in a given year than on the probability that a white defendant will be executed, and that the overall effect of elections is largest in the South. These findings raise concerns that state executions may fail to meet the constitutional requirements stipulated by the U.S. Supreme Court in *Gregg v. Georgia* for the administration of state death penalty laws. This paper was revised July 2002