Elections, Contracts and Markets

44 Pages Posted: 10 Aug 2006

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)

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Date Written: June 2006

Abstract

As the performance of long-term projects is not observable in the short run politicians may pander to public opinion. To solve this problem, we propose 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.

Keywords: Elections, threshold contracts, democracy, information markets, triple mechanism

JEL Classification: D72, D82

Suggested Citation

Gersbach, Hans and Muller, Markus, Elections, Contracts and Markets (June 2006). CEPR Discussion Paper No. 5717. Available at SSRN: https://ssrn.com/abstract=923612

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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