ESI Director of Research and Senior Economist Adam Ozimek’s paper on “The Regulation And Value of Prediction Markets” was released by The Mercatus Center.
Excerpt from the paper:
‘Prediction markets are exchanges where individuals trade what are sometimes called “event contracts.” Broadly speaking, these contracts specify some future event with different possible outcomes, define a payment structure based on those outcomes, and state a date when the contract expires. An example would be a contract that specifies “Barack Obama wins the US presidential election in 2012” and that pays out $10 after the election if that outcome occurs or $0 if it does not occur. The direct purpose of such markets is to allow individuals to bet on uncertain future events; however, these markets also produce prices that can provide valuable information. In fact, these markets are sometimes specifically created to gather the information that their prices reveal, rather than for the utility of trading to market participants….’