Information Markets, Elections and Contracts

45 Pages Posted: 8 Feb 2011

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Markus Muller

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)

Date Written: January 31, 2011

Abstract

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.

Keywords: democracy, elections, information markets, threshold contracts and triple mechanism

JEL Classification: D720, D820

Suggested Citation

Gersbach, Hans and Muller, Markus, Information Markets, Elections and Contracts (January 31, 2011). CESifo Working Paper Series No. 3327. Available at SSRN: https://ssrn.com/abstract=1756664

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Markus Muller

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

ETH-Zentrum
Zurich, CH-8092

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