moral hazard?

Intrigued by Andrew Leigh’s brief pointers on predictions markets, I have had a look at intrade, which offers markets in a number of different areas (eg. US or Israel engaging in air strikes on Iran, John McCain winning the Republican nomination for the 2008 election … ).

This is all very interesting. But surely there is a potential moral hazard here?

The people involved in making the decision to strike on Iran have a financial incentive to exploit the information that they have at the exclusion of the rest of the market. Maybe that is not so bad … it does mean that the market is likely to end up making an accurate prediction. But, if the stakes were high enough, then surely this could affect the decision itself — the President could decide to bomb Iran for (minimal) personal profit.


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