Endowment Effects in the Field: Evidence from India's IPO Lotteries

We study a unique field experiment in India in which 1.5 million stock investors face lotteries for the random allocation of shares. We find that the winners of these randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold them than lottery losers 1, 6, and even 24 months after the random allocation. This finding strongly evokes laboratory findings of an “endowment effect” for risky gambles, and persists in samples of highly active investors, suggesting along with additional evidence that this behaviour is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. Leading theories of the endowment effect based on reference-dependent preferences are unable to fully explain these and other findings in the data

Unshrouding Effects on Demand for a Costly Add-On: Evidence from Bank Overdrafts in Turkey

Models of shrouding predict that firms lack incentives to compete on add-on prices. Working with a large Turkish bank to test SMS direct marketing promotions to 108,000 existing checking account holders, we find that messages promoting a large discount on the overdraft interest rate reduce overdraft usage. In contrast, messages that mention overdraft availability without mentioning price increase usage. Neither change persists long after messages stop, suggesting that induced overdrafting is not habit-forming. Our results are consistent with a model of limited memory and attention

The runner-up effect

© 2016 by The University of Chicago. All rights reserved. Exploiting regression discontinuity designs in Brazilian, Indian, and Canadian first-past-the-post elections, we document that second-place candidates are substantially more likely than close third-place candidates to run in, and win, subsequent elections. Since both candidates lost the election and had similar electoral performance, this is the effect of being labeled the runner-up. Selection into candidacy is unlikely to explain the effect on winning subsequent elections, and we find no effect of finishing in third place versus fourth place. We develop a simple model of strategic coordination by voters that rationalizes the results and provides further predictions that are supported by the data

Learning from noise: evidence from India’s IPO lotteries

We study a natural experiment in which 1.5 million investors participate in allocation lotteries for Indian IPO stocks. Randomized IPO gains cause winning investors to increase applications to future IPOs and substantially increase portfolio trading volume in non-IPO stocks relative to lottery losers; the effects are symmetrically negative for experienced losses. Investors who have received multiple past IPO allocations show smaller responses, suggesting learning/selection moderates responses to noise shocks. The evidence is most consistent with investors learning about their own ability from experienced noise, drawing inferences about their skill from luck

On the impact of regulating commissions: Evidence from the Indian mutual funds market

Commissions-motivated agents have historically helped the development of many markets, but research suggests brokers motivated by commissions sometimes steer consumers towards inappropriate products. This issue is particularly important in household financial markets where consumers may be unable to evaluate products on their own. While reforms attempting to limit commission payments have been undertaken worldwide, little research has evaluated the impact of these reforms. We study a major Indian investor protection reform that attempted to reduce commissions tied to mutual fund sales by banning the distribution fees that mutual funds had previously earmarked for commissions. We analyze the policy impact by comparing funds charging high versus low distribution fees pre-reform and find no evidence that the reform itself reduced fund flows. We argue that the most plausible explanation is that the Indian asset management industry maintained substantial commissions to brokers through other revenue sources apart from the banned distribution fees

Continued Existence of Cows Disproves Central Tenets of Capitalism?

We examine the returns from owning cows and buffaloes in rural India. With labor valued at market wages, households earn large, negative median returns from holding cows and buffaloes, at -304% and -75%, respectively. Making the stark assumption of labor valued at zero, median returns are then -5% for cows and +10% for buffaloes (with 52% and 46% of households earning negative returns for cows and buffaloes, respectively). Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong? We discuss potential explanations, including labor market failures, for why livestock investments may persist