DP5717 Elections, Contracts and Markets

Author(s): Hans Gersbach, Markus Müller
Publication Date: June 2006
Keyword(s): democracy, elections, information markets, threshold contracts, triple mechanism
JEL(s): D72, D82
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5717

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.