The Politics of Information Markets, and Information Markets in Politics Adam Meirowitz Joshua Tucker Princeton University

Politics of Information Markets The Legacy of PAM –Political Reaction –Media Reaction –Result for Program Lessons from PAM for future political information markets

The Legacy of PAM Summer of 2003: Defense Advanced Research Projects Agency (DARPA) funds development of a Policy Analysis Market for futures on political events in the Middle East –Robin Hanson knows far more about the project.

What was DARPA’s proposed informaton market called? “Unbelievably stupid” - Sen. Dorgan “A futures market in death” - Hillary Clinton “make believe markets trading impossibilities that turn the stomach” - Sen. Wyden “Dr. Strangelove caught in bizarre betting parlor”

What happened? July 28, Sens. Wyden and Dorgan (D) press conference Morning of July 29, NYT and major press sources cover Afternoon of July 29, the program is cancelled Deputy Defense Secretary Wolfowitz: “I share your shock at this kind of program. We’ll find out about it but its being terminated.”

Postscript Admiral Poindexter eventually retires in embarrassment Bipartisan criticism All this over a market that never opened

Number of Newspaper articles on PAM (July-August 2003) Lexis-Nexis search OpposedNeutralIn favorTotal News Opinion Total

Media issues Majority of coverage was superficial dealing with “morality” A few stories speculate about: –Inducement of terrorism-profit motive –Terrorists getting rich (External) –Manipulation of market by terrorist (Internal) “Primacy of Iowa” as reference point

Packaging Problem: Profit as inherently dangerous concept politically Solution: Frame markets comparatively

Profit as inherently dangerous concept politically “Immoral” to profit on “bad” events Threat to manipulation when profit is at stake seems more consequential in a political context –Throwing a basketball game vs throwing an election. –Manipulating a stock price vs. a terrorist attack

Packaging suggestions Frame market as improvement over other aggregation institutions –Organizations already exist for these purposes, so question is not about topic –Question is: are markets better at aggregating information? Do the actual welfare comparison so politicians see the trade offs Provide this information as part of introduction so politicians, press can reference it in initial evaluations

Information Markets in Politics Incentives when information market is imbedded in a policy making setting Information from market prices can effect beliefs about states which effect preferences about policies But this may lead to an incentive problem- Manipulate beliefs to influence policy selection

Simple informational environment Two states x ε{a,b}, two policies p ε{a,b}. Some agents (θ=1) want p=x some (θ=-1) want p≠x. Agents know which preference type they are and learn a signal s that is informative about x. Mechanism aggregates information and preferences and selects p Question: Can we get the full information majority rule core policy?

Communication and voting Without transfers communication will not work. Some type (θ=-1) is likely to be in minority They want to influence beliefs about x So lying about s is a desirable deviation

State contingent transfers With transfers that depend on message and state truthful implementation is possible. Transfer to i needs to compensate for probability that i’s information moves posteriors about x in a meaningful manner.

Message contingent transfers With transfers that depend on just other messages truthful implementation is possible. Incentive to be truthful as best predictor of other messages is your own message.

Decentralizing transfer schemes Give agents choice of Arrow Securities on state or on majority message. Prices are selected to satisfy IC conditions and budget balance.

How about endogenous prices Markets as games (Shapely and Shubik, 1977; Jackson and Peck, 1999) Endow traders with risk free asset and Arrow security that pays off if x=a. Allow trader to decide if she wants to sell B units of the risk free (action 1) or sell Q units of the risky asset (action 0). Set price of P=Bn 1 /Qn 0

Positive result We can fix values of B and Q to achieve the full information majority rule core.

But…. Letting participants determine how much they want to trade, can be problematic. Finite populations –full aggregation fails (Dubey, Geanakopolis and Shubik 1987) Failure of efficient markets hypothesis in these games without politics (Peck and Jackson) Open question when imbedded in political problem.