by Adam Ozimek
Mercatus Center
March 12, 2014
Working Paper Series
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. 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. Prediction market prices have informational value because they aggregate the beliefs of market participants and reveal what the market overall forecasts are the odds of the event at hand occurring. This information is useful not only to traders, but to researchers, businesses, governments, and others. Yet, the regulatory environment for prediction markets in the United States has been more skeptical than supportive. In particular, the recent blocking of movie box-office and political prediction markets indicates a worsening regulatory environment.

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