Evidence of Adverse Selection from Thoroughbred Wagering

Abstract

Previous research has shown the thoroughbred sales market to be affected by adverse selection. In the market, sellers who race as well as breed thoroughbreds will choose to keep thoroughbreds when their estimated private values exceed expected sales prices. The presence of asymmetric information leads these sellers to sell their low‐quality horses and keep their best for racing. We extend the analysis by examining how bettors use similar information when wagering on thoroughbred races. We show, using a sample of two‐year‐old maiden races, that homebreds (those horses kept by their breeders for racing) are favored over otherwise similar nonhomebreds.