Essays in behavioral finance

This dissertation explores ways to identify bias and rent seeking in two domains: firms' decisions to compensate executives and politicians' decisions to secure federal funds for local projects. Biases held by executive boards and rent seeking by politicians both can lead to inefficient allocation of resources. Identifying these behaviors can be difficult but is key to increased efficiency.;The first essay examines whether greater corporate board independence alleviates the gender gap in executive compensation. I test the effect on the gender pay gap of the 2003 change to NYSE/NASD Corporate Governance Listing Standards that required U.S. companies to convert to more independent boards. The gender gap in compensation increased in firms that were required to convert to more independent boards relative to firms that were not; the increase subsequently moderated. This evidence is consistent with a model of employer learning with biased priors: outsiders on the board have less information about executives' productivity than insiders and so initially rely on biased prior beliefs about women's ability as a group until they learn more about individual executives' productivity.;The second essay explores whether boards reveal an attribution bias when they assign credit and blame to men and women executives for their firm's performance. I find that for executives overall and men especially there is negative shielding---total compensation increases more in times of increasing market value than it decreases in times of decreasing market value. Yet women's pay shows a more symmetric response to increases and decreases in firms' market value. This pattern in pay to performance suggests boards have a bias in attribution that ascribes blame in bad times more to women than to men.;The third essay examines the spread of inefficient earmarks spending in the United States between 1995 and 2005, after an innovation in the federal budgetary process that weakened accountability mechanisms pertaining to federal spending on local projects. Data suggests the presence of neighbor effects in the spread of earmarks---increases in neighboring states' earmark expenditures predict increases in the number of earmarks a state receives in the following year. Moreover, rent-seeking strategies of blame-avoidance and trading favors appear to emerge among members of Congress.