Discussion paper

DP5717 Elections, Contracts and Markets

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.

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Citation

Gersbach, H and M Müller (2006), ‘DP5717 Elections, Contracts and Markets‘, CEPR Discussion Paper No. 5717. CEPR Press, Paris & London. https://cepr.org/publications/dp5717