A number of prominent economists have signed on to a statement seeking reform of government policy toward prediction markets. The abstract:
Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors.
We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.
Steven Leavitt thinks the statement doesn’t go far enough because it tries to create a sharp distinction between small stakes prediction markets, to be permitted, and gambling markets more generally, of uncertain status or prohibited. I think Leavitt is right that there is no sharp distinction at the boundary between prediction markets and gambling over event outcomes more generally. Leavitt is right that policy should be more permissive toward both. Leavitt is also right that government policies toward gambling are rife with contradictions.
Nonetheless, further applied research and development of prediction markets should not be made to wait until prediction markets researchers can persuade the U.S. Congress to legalize all kinds of gambling everywhere. The “safe harbor for small stakes” approach won’t please the purists, but will help advance research. A small step forward is movement in the right direction.