Essays in finance and public economics

The first chapter presents a theoretical model of asset pricing that analyses how the behavior of stock returns is affected by the presence of regret averse investors in the market. The model predicts market over-reaction on good or bad news, and an excess volatility of stock returns. It helps to explain such well-established empirical puzzles as the positive short-run and negative long-run autocorrelation of stock returns, and it predicts a positive correlation between future trading volume and the dispersion of stock returns. The framework developed in this chapter helps to analyze how an improvement of stock market accessibility affects the predictability of stock returns. Using stock market data, this chapter also presents an empirical analysis of some of the model's implications.; The second chapter analyzes how the optimal design of an English auction changes when we accommodate for people's loss aversion. It shows that the order in which bidders place their bids matters, and that the first bidder has an advantage. We analyze how optimal auction design (open vs. sealed-bid) and optimal reservation price depend on the degree of bidders' loss aversion and on seller's valuation of the object. We show that it might be optimal for a seller to set a reserve price below his own valuation of the object. We also show that a seller who maximizes expected revenue should implement an open-bid English auction.; This third chapter presents a model of political competition that explains the positive correlation between money spent by a political party on the election campaign and the number of votes it receives. The model does not assume that money can be used to fool voters or to buy votes. However, it shows that it is possible that there are unobservable factors that affect both campaign spending and the results of the campaign. It analyzes how wealth inequality and costs of information dissemination affect the choice of political platforms and amounts of money spent by political parties, and shows that all parties have incentives to spend money on a campaign.