Why no prediction markets for large infrastructure projects?
Been reading this excellent piece on why prediction markets aren’t popular. They say that without subsidies prediction markets won’t be large enough; the information value of prediction markets is often nog high enough.
Large infrastructure projects undertaken by governments, and other large actors often go overbudget, often hilariously so: 3x,5x,10x or more is not uncommon, indeed often even the standard.
One of the reasons is that government officials deciding on billion dollar infrastructure projects don’t have enough skin in the game. Politicians are often not long enough in office to care on the time horizons of large infrastructure projects. Contractors don’t gain by being efficient or delivering on time. To the contrary, infrastructure projects are huge cashcows. Another problem is that there are often far too many veto-stakeholders. All too often the initial bid is wildly overoptimistic.
Similar considerations apply to other government projects like defense procurement or IT projects.
Okay—how to remedy this situation? Internal prediction markets theoretically could prove beneficial. All stakeholders & decisionmakers are endowed with vested equity with which they are forced to bet on building timelines and other key performance indicators. External traders may also enter the market, selling and buying the contracts. The effective subsidy could be quite large. Key decisions could save billions.
In this world, government officials could gain a large windfall which may be difficult to explain to voters. This is a legitimate objection.
A very simple mechanism would simply ask people to make an estimate on the cost C and the timeline T for completion. Your eventual payout would be proportional to how close you ended up to the real C,T compared to the other bettors. [something something log scoring rule is proper].
The standard reply is that investors who know or suspect that the market is being systematically distorted will enter the market on the other side, expecting to profit from the distortion. Empirically, attempts to deliberately sway markets in desired directions don’t last very long.
Why no prediction markets for large infrastructure projects?
Been reading this excellent piece on why prediction markets aren’t popular. They say that without subsidies prediction markets won’t be large enough; the information value of prediction markets is often nog high enough.
Large infrastructure projects undertaken by governments, and other large actors often go overbudget, often hilariously so: 3x,5x,10x or more is not uncommon, indeed often even the standard.
One of the reasons is that government officials deciding on billion dollar infrastructure projects don’t have enough skin in the game. Politicians are often not long enough in office to care on the time horizons of large infrastructure projects. Contractors don’t gain by being efficient or delivering on time. To the contrary, infrastructure projects are huge cashcows. Another problem is that there are often far too many veto-stakeholders. All too often the initial bid is wildly overoptimistic.
Similar considerations apply to other government projects like defense procurement or IT projects.
Okay—how to remedy this situation? Internal prediction markets theoretically could prove beneficial. All stakeholders & decisionmakers are endowed with vested equity with which they are forced to bet on building timelines and other key performance indicators. External traders may also enter the market, selling and buying the contracts. The effective subsidy could be quite large. Key decisions could save billions.
In this world, government officials could gain a large windfall which may be difficult to explain to voters. This is a legitimate objection.
A very simple mechanism would simply ask people to make an estimate on the cost C and the timeline T for completion. Your eventual payout would be proportional to how close you ended up to the real C,T compared to the other bettors. [something something log scoring rule is proper].
Doesn’t the futarchy hack come up here? Contractors will be betting that competitors timelines and cost will be high, in order to get the contract.
The standard reply is that investors who know or suspect that the market is being systematically distorted will enter the market on the other side, expecting to profit from the distortion. Empirically, attempts to deliberately sway markets in desired directions don’t last very long.