Does Transparency Reduce Favoritism and Corruption? Evidence from the Reform of Figure Skating Judging

Transparency is usually thought to reduce favoritism and corruption by facilitating monitoring by outsiders, but there is concern it can have the perverse effect of facilitating collusion by insiders. In response to vote trading scandals in the 1998 and 2002 Olympics, the International Skating Union (ISU) introduced a number of changes to its judging system, including obscuring which judge issued which mark. The stated intent was to disrupt collusion by groups of judges, but this change also frustrates most attempts by outsiders to monitor judge behavior. I find that the "compatriot-judge effect", which aggregates favoritism (nationalistic bias from own-country judges) and corruption (vote trading), actually increased slightly after the reforms.

Experimental Political Betting Markets and the 2004 Election.

Betting on elections has been of interest to economists and political scientists for some time. We recently persuaded TradeSports to run experimental contingent betting markets, in which one bets on whether President Bush will be re-elected, conditional on other specified events occurring. Early results suggest that market participants strongly believe that Osama bin Laden's capture would have a substantial effect on President Bush's electoral fortunes, and interestingly that the chance of his capture peaks just before the election. More generally, these markets suggest that issues outside the campaign, like the state of the economy, and progress on the war on terror , are the key factors in the forthcoming election.Other Topics

How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach

Although mutual funds exhibit little ability to persistently outperform their peers, money flows into funds with the highest past returns. Berk and Green (2004) rationalize these patterns by arguing that more-skilled managers manage more assets but, because of diseconomies of scale, generate the same expected returns as less-skilled managers. To identify the causal impact of fund size on performance, we exploit the fact that small differences in mutual fund returns can cause discrete changes in Morningstar ratings that, in turn, generate discrete differences in mutual fund size. Our regression discontinuity estimates yield little evidence that fund size erodes fund returns.

Five Open Questions About Prediction Markets

Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decision-making and risk management -- in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.

Interpreting prediction market prices as probabilities

While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution on beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.Forecasting ; Financial markets ; Econometric models

Prediction Markets in Theory and Practice

Prediction Markets, sometimes referred to as "information markets," "idea futures" or "event futures", are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.

Five open questions about prediction markets

Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decisionmaking and risk management--in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.Forecasting ; Financial markets ; Econometric models

How Prediction Markets can Save Event Studies

Event studies have been used in political science to study the cost of regulation (Schwert, 1981), the value of political connections (Roberts, 1990a; Fisman, 2001), the effect of political parties on defense spending (Roberts, 1990b), the importance of rules in congressional committees (Gilligan and Krehbiel, 1988), the reaction of different interests to trade legislation (Schnietz, 2000), how party control in parliamentary systems affects broad-based stock indices (Herron, 2000), the value of defense contracts (Rogerson, 1989), the effect of the political party of the US President and congressional majorities on particular industry segments (Mattozzi, 2008; Knight, 2006; Herron et al., 1999; Den Hartog and Monroe, 2008; Monroe, 2008; Jayachandran, 2006), and other questions

Partisan impacts on the economy: evidence from prediction markets and close elections

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.Federal government ; Political science ; Economic policy