Elections, Contracts and Markets

Hans Gersbach, CER-ETH Center of Economic Research at ETH Zurich
Markus Müller, CER-ETH Center of Economic Research at ETH Zurich

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.