A New Approach for Regulating Information Markets

Information markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. They have the potential to improve decision making and policies throughout the economy. At the same time, there are regulatory hurdles to establish such markets, largely arising from state prohibitions on Internet gambling. This paper reviews the current regulatory structure for information markets in the United States and offers recommendations for reform. We argue that the authority for regulating many information markets should be shifted from the states to the federal government. In addition, the Commodity Futures Trading Commission should administer an “economic purpose test”. That test would only allow information market contracts that are likely to provide significant financial hedging opportunities or valuable information for improving economic decisions. Copyright Springer Science+Business Media, Inc. 2006