Discussion Paper Details

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Title: Elections, Contracts and Markets

Author(s): Hans Gersbach and Markus Müller

Publication Date: June 2006

Keyword(s): democracy, elections, information markets, threshold contracts and triple mechanism

Programme Area(s): Public Economics

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.

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Bibliographic Reference

Gersbach, H and Müller, M. 2006. 'Elections, Contracts and Markets'. London, Centre for Economic Policy Research.