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Information Markets, Elections and Contracts

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  • Hans Gersbach
  • Markus Müller

Abstract

Politicians may pander to public opinion and may renounce undertaking beneficial long-term projects. To alleviate this problem, we introduce a triple mechanism involving political information markets, reelection threshold contracts, and democratic elections. An information market is used to predict the long-term performance of a policy, while threshold contracts stipulate a price level on the political information market that a politician must reach to have the right to stand for reelection. Reelection thresholds are offered by politicians during campaigns. We show that, on balance, the triple mechanism increases social welfare. Finally, we suggest several ways to avoid the manipulation of information markets and we discuss possible pitfalls of the mechanism.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3327.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3327

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Keywords: democracy; elections; information markets; threshold contracts and triple mechanism;

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References

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  1. Hans Gersbach & Maik T. Schneider, 2009. "Tax Contracts and Elections," CER-ETH Economics working paper series 09/123, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  2. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers 1854, Stanford University, Graduate School of Business.
  3. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, Springer, vol. 50(1), pages 5-25, January.
  4. Hahn, Volker, 2009. "Reciprocity and voting," Games and Economic Behavior, Elsevier, Elsevier, vol. 67(2), pages 467-480, November.
  5. Hans Gersbach, 2004. "Competition of Politicians for Incentive Contracts and Elections," Public Choice, Springer, Springer, vol. 121(1), pages 157-177, October.
  6. Gersbach, Hans & Liessem, Verena, 2005. "Re-election Threshold Contracts in Politics," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5175, C.E.P.R. Discussion Papers.
  7. Gersbach, Hans & Muller, Markus, 2006. "Elections, Contracts and Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5717, C.E.P.R. Discussion Papers.
  8. repec:reg:rpubli:259 is not listed on IDEAS
  9. Berlemann, Michael & Schmidt, Carsten, 2001. "Predictive accuracy of political stock markets: Empirical evidence from a European perspective," SFB 373 Discussion Papers 2001,57, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  10. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198293323, October.
  11. Paul W. Rhode & Koleman S. Strumpf, 2004. "Historical Presidential Betting Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 127-141, Spring.
  12. William D. Nordhaus, 2006. "After Kyoto: Alternative Mechanisms to Control Global Warming," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 31-34, May.
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