- The Bandwagon Effect and the Market for Bias
- Presented at: Washington University × 3 (Informal Seminar in Economic Theory, PhD Brownbag, Breakfast Seminar), Yale University (Whitebox Advisors Graduate Student Conference on Behavioral Science)
- Abstract: This paper presents a new mechanism to explain the rise of media bias. In our model, consumers are completely rational but are unconcerned about the truth. By incorporating psychological utility into our model, we find that the conformity of people, which is documented in the psychology literature, can induce heterogeneous agents to narrow the gaps between their sentiments and the social dominant views by selecting biased news media. The intuition is that a Bayesian agent will correctly discount the bias, hence she can control the distribution of her posterior belief by choosing the news media with desirable bias. We show that perfectly unbiased media outlets cannot exist in equilibrium regardless of the market structure, and hence bias cannot be eliminated by competition. This result has important policy implications if we consider the considerable externalities of media outlets. Another interesting result is that media firms would not perfectly recover the true state of the world even the cost of doing so is zero. In addition, under monopoly and duopoly cases, media firms will invest as little resource on searching news as possible if people can read news without any cost.
- Keywords: Media bias, Psychological games, Conformity
- JEL Classification: C72, D83, L12, L13
- Review of Financial Studies