I have to admit, before today I had never thought about the change of incentives that a liquid policy prediction market would bring about.

After a few hours consideration, I too am cautiously optimistic.  The way I see it, these are the foreseeable effects, in the order of decreasing trading volume:

1.  Subjects of the government could hedge against policies that harm them, from doctors hedging against reduced Medicare funding, to middle class and up hedging against higher taxes.  This removes a huge part of the incentive to lobby and/or vote, and provides much more utility than lobbying or voting ever did.

2.  Paid Lobbyists could hedge against failure, which reduces the number of times lobbyists feel they need to “fight to the death” for their clients.  This would allow lobbyists to give up on difficult battles and focus on more important or likely to succeed ones.  Thus we get the bizarre result of making the lobbyists more efficient, while also reducing their power.  This dovetails well with the decreased incentive to pay lobbyists in the first place noted above.

3.  Politicians could hedge against the failure of bills that they are bribed to support, lessening the hold that the lobbyist has on them.  Also, every politician would have pet bills that they heavily bet in favor of when they seemed unlikely.  This is little different then the current situation where every politician has pet bills that they are paid to support, except the influence of the special interest is now gone.  I think this has the effect of boosting integrity by reducing the influence of lobbyists while encouraging candidates to invest in their outspoken interests.

Overall, I am coming to your side here.  Subjects get much more utility from hedging against damaging policy, lobbyists are forced to become more efficient and persuasive, and bribes lose much, if not most of their value.

I even disagree with Patri’s criticism.  I think that the easier fundraising for candidates using the markets adds more value in decreasing special interest influence through funding than it loses by disenfranchising poorer candidates, who are already *very* disenfranchised.

Unfortunately, the idea seems very hard to market.  Politicians would not be in favor of changing the balance of power, even if we can demonstrate it benefits everyone.  Perhaps the better strategy would be to implement this first somewhere very corrupt, like in Africa, where the politicians wouldn’t fight another way to make money; and then demonstrate the decreasing corruption and increasing utility.

–
Ryan