Government Prediction Markets: Why, Who, and How

Abstract

This paper describes how prediction markets can make governments smarter, cheaper, and more responsive to changing conditions. A prediction market resembles a stock exchange where traders buy and sell not shares of companies, but claims about future events. Academic and commercial use of prediction markets suggests that they offer a useful tool for encouraging, collecting, and quantifying widely scattered expertise. Government administrators have begun experimenting with prediction markets, too. Many questions remain, however, about the proper way to implement government prediction markets. This paper opens with a brief survey of the costs and benefits of government prediction markets. It then turns to ironing out the statutory and regulatory wrinkles occasioned by government prediction markets in general, and by federal executive prediction markets in particular. Government agencies should outsource the provision of prediction markets and let employees and outside contractors trade on them. To mitigate the legal risks raised by offering cash or other valuable consideration to traders, government prediction markets should host spot transactions in negotiable conditional notes, offer traders seed funding, and contractually mandate a minimum level of trading. The paper concludes by describing a three-step plan for putting prediction markets to work for the United States government and, through it, for the People.

Keywords: markets, prediction markets, executive branch, gambling, commodities futures trading, securities