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Information Markets, Elections and Contracts

  • Hans Gersbach
  • Markus Müller

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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  1. Gersbach, Hans & Liessem, Verena, 2005. "Re-election Threshold Contracts in Politics," CEPR Discussion Papers 5175, C.E.P.R. Discussion Papers.
  2. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts and elections," European Economic Review, Elsevier, vol. 56(7), pages 1461-1479.
  3. William D. Nordhaus, 2006. "After Kyoto: Alternative Mechanisms to Control Global Warming," American Economic Review, American Economic Association, vol. 96(2), pages 31-34, May.
  4. repec:reg:rpubli:259 is not listed on IDEAS
  5. Berlemann, Michael & Schmidt, Carsten, 2001. "Predictive accuracy of political stock markets: Empirical evidence from an European perspective," Dresden Discussion Paper Series in Economics 05/01, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  6. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, July.
  7. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers 1854, Stanford University, Graduate School of Business.
  8. Hahn, Volker, 2009. "Reciprocity and voting," Games and Economic Behavior, Elsevier, vol. 67(2), pages 467-480, November.
  9. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  10. 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.
  11. Hans Gersbach, 2001. "Competition of Politicians for Incentive Contracts and Elections," CESifo Working Paper Series 406, CESifo Group Munich.
  12. Hans Gersbach & Markus Müller, 2006. "Elections, Contracts and Markets," CER-ETH Economics working paper series 06/56, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
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