The Timing of Bets and the Favorite-Longshot Bias

We propose a dynamic model of parimutuel betting that addresses the following three empirical regularities: a sizeable fraction of bets is placed early, late bets are more informative than early bets, and proportionally too many bets are placed on longshots. Exploiting a similarity with Cournot oligopoly, we show that bettors have an incentive to bet early when they are large and act on common information. Bettors who are instead privately informed and small have an incentive to bet at the end without access to the information of the others. Longshots (or favorites) are then less (or more) likely to win than indicated by the market odds.