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Research Interests: Agency problems in financial services, prediction markets
Courses Taught: Topics in Money and Finance (Economics 46)
Office: 304C Silsby Hall
“Forensic Economics” Journal of Economics Literature, Sept. 2012, vol. 50 no. 3, pp.731-769
Background: In many aspects of life, people have incentives to conceal their behavior, especially when the behavior in question is unethical or illegal. The field of forensic economics seeks to apply economic and statistical theory in order to detect the existence of “hidden behaviors” to which people will not readily admit. This survey paper provides an overview of the growing field of forensic economics.
Summary: There are many different methodologies that economists can use to detect hidden behavior. One strategy is to compare two different data sources that should theoretically provide the same data. For example, in one paper, Professors Zinman and Zitzewitz compare snowfall reports by government weather stations and ski resorts. The resorts consistently report higher snowfall. Moreover, the difference between snow reports from resorts and government weather stations becomes larger during weekends, particularly at resorts that cater to experts or that are within driving distance of a major city. This seems to suggest that ski resorts are more likely to over-report snowfall when the benefits of doing so are higher.
Another strategy to detect hidden behavior is to rule out the stated reasons for that behavior. In a second paper, Jonathan Reuter and Professor Zitzewitz find that personal finance magazines are more likely to recommend mutual funds that advertise in their magazines. This relationship remains even after one takes into account characteristics that one would normally use to rank mutual funds, such as past returns and expenses.
Researchers are also interested in quantifying the extent to which the degree of hidden behavior varies with the profitability of doing so. One way to measure this relationship is to exploit discontinuities in incentives. In a third paper, Professor Zitzewitz examined how compliance with a particular Securities and Exchange Commission regulation changed when the SEC chairperson changed. In this case, compliance fell when an SEC chairman who favored this particular regulation was replaced by a chairwoman who opposed the regulation.