Information Markets, Elections and Contracts

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