Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market
Amiyatosh K. Purnanandam
University of Michigan, Stephen M. Ross School of Business
Georgia Institute of Technology - Scheller College of Business
July 22, 2014
Journal of Finance, Forthcoming
We analyze the role of financial markets in shaping the incentives of government agencies using a unique empirical setting: the weather derivatives market. We show that the introduction of weather derivative contracts on the Chicago Mercantile Exchange improves the accuracy of temperature measurement by 13-20% at the underlying weather stations. We argue that temperature-based financial markets generate additional scrutiny of the temperature data measured by the National Weather Service, which 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.
Number of Pages in PDF File: 46
JEL Classification: G30, H00
Date posted: August 31, 2012 ; Last revised: June 3, 2015
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