I see the main problem with these schemes as one of liquidity and collateral. Generally it’s difficult to set up prediction markets where you condition on unlikely events (like a market on what’s essentially a regression discontinuity) because assets that only pay out a small fraction of the time are not attractive to most buyers: if they don’t hold a huge diversified portfolio of claims it means they must tie up a large amount of cash in collateral for small expected returns, and in those situations the cash can often get higher returns elsewhere so people simply don’t trade. I think Zvi talked about this in his post on prediction markets before.
You could potentially get around this if there were big institutional players who held large diversified portfolios of shares in many different markets, since then they don’t actually have to tie up anything like the maximum amount of money they could lose in their bets as collateral. For that to happen you would either need people to already be trading on these markets (so there’s someone to make money from) or you would need someone to be subsidizing these markets a lot. I suspect that kind of subsidy scheme would be impractical too, so I’m not sure how to go about implementing these conditional prediction market ideas generally.
I don’t know if there’s any existing literature on this either; it would be nice if someone who knew could comment, though it’s unlikely given how old the top comment is.
I see the main problem with these schemes as one of liquidity and collateral. Generally it’s difficult to set up prediction markets where you condition on unlikely events (like a market on what’s essentially a regression discontinuity) because assets that only pay out a small fraction of the time are not attractive to most buyers: if they don’t hold a huge diversified portfolio of claims it means they must tie up a large amount of cash in collateral for small expected returns, and in those situations the cash can often get higher returns elsewhere so people simply don’t trade. I think Zvi talked about this in his post on prediction markets before.
You could potentially get around this if there were big institutional players who held large diversified portfolios of shares in many different markets, since then they don’t actually have to tie up anything like the maximum amount of money they could lose in their bets as collateral. For that to happen you would either need people to already be trading on these markets (so there’s someone to make money from) or you would need someone to be subsidizing these markets a lot. I suspect that kind of subsidy scheme would be impractical too, so I’m not sure how to go about implementing these conditional prediction market ideas generally.
I don’t know if there’s any existing literature on this either; it would be nice if someone who knew could comment, though it’s unlikely given how old the top comment is.
All of these seem to be good points, although I haven’t given up on liquidity subsidy schemes yet.