Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market

46 Pages Posted: 31 Aug 2012 Last revised: 26 Oct 2015

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business

Date Written: July 22, 2014

Abstract

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.

JEL Classification: G30, H00

Suggested Citation

Purnanandam, Amiyatosh K. and Weagley, Daniel, Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market (July 22, 2014). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2139185 or http://dx.doi.org/10.2139/ssrn.2139185

Amiyatosh K. Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 385-3015 (Phone)

HOME PAGE: http://www.danielweagley.com

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