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Options to the Realm: A Cost Neutral Proposal to Improve Political Incentives

20 Pages Posted: 14 Jul 2017 Last revised: 17 Nov 2017

Joshua R. Hendrickson

University of Mississippi; American Institute for Economic Research

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Date Written: July 7, 2017

Abstract

In this paper we draw on the literature on political property rights to propose a cost neutral reform aimed at promoting long-run economic prosperity. We propose replacing politicians' defined benefit pensions with a financial contract that is tied to economic performance. In particular, we propose a contract that pays out a lump sum to a politician 30 years after their election if real GDP per capita is above some preset benchmark. Furthermore, we show that the contract can be priced such that it is cost neutral in terms of present value with a defined-benefit pension. We argue that this contract provides a net benefit to society.

Keywords: political property rights, public choice, pensions, option pricing

JEL Classification: D70, D72

Suggested Citation

Hendrickson, Joshua R. and Salter, Alexander William, Options to the Realm: A Cost Neutral Proposal to Improve Political Incentives (July 7, 2017). Available at SSRN: https://ssrn.com/abstract=2998759

Joshua R. Hendrickson (Contact Author)

University of Mississippi ( email )

Oxford, MS 38677
United States

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Alexander William Salter

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

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