Abstract

http://ssrn.com/abstract=2139185
 


 



Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market


Amiyatosh K. Purnanandam


University of Michigan, Stephen M. Ross School of Business

Daniel Weagley


Georgia Institute of Technology - Scheller College of Business

July 22, 2014


Abstract:     
We analyze the role of financial markets in shaping the incentives of government agencies using a unique empirical setting: the weather derivatives market. The Chicago Mercantile Exchange has introduced several temperature related derivative contracts on different U.S. cities in a staggered fashion since 1999. The payoffs of these contracts depend on the temperature levels at a specific weather station in the underlying city. We show that the introduction of these contracts improves the accuracy of temperature measurement by the dedicated weather station of the National Weather Services (NWS) in that city. We argue that temperature-based financial markets generate additional scrutiny of the temperature data measured by the NWS, which in turn motivates the agency to minimize measurement errors. Our results have broader implications: the visibility and scrutiny generated by financial markets can potentially improve the efficiency of government agencies even in the absence of explicit incentive contracts.

Number of Pages in PDF File: 61

working papers series


Download This Paper

Date posted: August 31, 2012 ; Last revised: July 27, 2014

Suggested Citation

Purnanandam, Amiyatosh K. and Weagley, Daniel, Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market (July 22, 2014). Available at SSRN: http://ssrn.com/abstract=2139185 or http://dx.doi.org/10.2139/ssrn.2139185

Contact Information

Amiyatosh K. Purnanandam (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
Daniel Weagley
Georgia Institute of Technology - Scheller College of Business ( email )
800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 385-3015 (Phone)
HOME PAGE: http://www.danielweagley.com
Feedback to SSRN


Paper statistics
Abstract Views: 1,208
Downloads: 144
Download Rank: 117,371

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.406 seconds