Essays in Financial and Political Economics

Abstract

In chapter 1, I show that investors' tendency to extrapolate from past return data is in part driven by the salience of past returns. I exploit the Wall Street Journal's historical practice of reporting the 52-week return on the Dow Jones Industrial Average. When the return on a past day loses salience due to rolling out of the 52-week window, I detect an impact of the opposite sign on the current day return. Analogously for mutual funds, I exploit the SEC regulation that mutual funds report the 1-year, 5-year, and 10-year returns in any advertisement that contains performance information. When the return on a past quarter loses salience due to rolling out of the 1-year reporting window, I detect an impact of the opposite sign on the mutual fund's flows in the current period.RESOLVED R 04/03/18: be more precise “by the SEC, the mutual fund receives flows” Both effects are consistent with investor extrapolation. In chapter 2, we investigate the empirical nature and explanation for the stability of majority rule in games with empty cores, in the context of laboratory repeated three-player sharing games. We show there is stability at the fair allocation, which splits the pot equally among the three players, and stability at perfect side deals, which splits the pot equally between two players leaving the third out. Individual behavior analysis shows that the players unwillingness to leave perfect side deals in favor of imperfect side deals is consistent with payoff maximization due to the instability of imperfect side deals, while the stability of the fair allocation is in part supported by a non-payoff motivated tendency towards fairness. We show that stability at perfect side deals is a unique equilibrium in a small but intuitive set of strategy profiles. In chapter 3, we measure the value of D.C. lobbyists' connections to senators and members of the house by tracking changes in lobbying income after connections are lost or gained. We use two measures of connection: donations from the lobbyist to the politician, and shared issues between the lobbyist's projects and the politician's congressional committee assignments. We find that the loss of a connection due to the politician exiting office hurts lobbyists' income going forward, controlling for current income, but we do not find consistent evidence of a benefit from gaining a connection due to the politician entering office. The largest impact we find is the loss of income from the exit of a connection in the Senate, and we provide evidence from close elections supporting the causal interpretation.