A New Approach for Regulating Information Markets

Abstract:     
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.

The demand for information markets appears to be increasing. At the same time, there are regulatory hurdles to establishing 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 make two points: first, the authority for regulating many information markets should be shifted from the states to the federal government. Second, the federal government should implement a clear policy that would allow a large number of information market contracts.

We argue that the Commodities Futures Trading Commission should regulate certain kinds of information market contracts that are futures contracts. Particular contracts should satisfy an economic purpose test administered by the CFTC. That test should consider whether an information market contract would allow for significant financial hedging or improve economic decisions. In addition, some types of information markets, such as over-the-counter markets, should remain exempt from CFTC regulation altogether. We believe that the effect of our proposal would be to enhance the development of information markets that improve economic decision making.

Accepted Paper Series