Options to the Realm: A Cost Neutral Proposal to Improve Political Incentives
20 Pages Posted: 14 Jul 2017 Last revised: 17 Nov 2017
Date Written: July 7, 2017
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: Suggested Citation