Vice President Cheney has promised that Iran will not get nuclear weapons. If we had a very liquid current events prediction market then the U.S. government could bet, say, $20 billion that over the next 10 years Iran will not explode an atomic weapon.
However, this sort of behaviour would make the prediction market less accurate. Whatever the effect of $20 billion dollars would have on the US and Iraninan behaviour, it is unlikely to reduce the chances of Iran getting the bomb by precisely twenty billion dollars worth of prediction markets.
And it removes one major player - the US government - from participating accurately in the prediction market.
Also, say the U.S. targeted the $20 billion offer - say it only takes bets from Iranian citizens.
It sounds as if the best idea would be to combine this with members of congress and presidential candidates taking large personal bets that Iran won't get the bomb.
You have to distinguish between (1) the Bush administration's desire to stop the program and (2) Iran's estimate of the Bush administration's desire to stop the program. If (1) is currently much higher than (2) then the U.S. and Iran might end up at war. One of the benefits of my suggested bet is that it credibly signals a high (1) and so raises (2).
You are right that if Iran still decides to build atomic weapons after such a bet is made, then the bet will cause them to put greater resources into hiding the weapons program.
But Cheney's threat, I suspect, was made in the hopes of scaring Iran into stopping its program. If that is our government's goal, then I believe the bet I suggested would increase the odds of achieving this goal.
Couldn't such a program cause Iran's nuclear project to become even less transparent than it already is?
Even with the wager in place the US would still have a time inconsistency problem. While there would be a large incentive to prevent Iran from acquiring a weapon, the bet would not add to the US's incentive to punish Iran once a weapon had already been produced. Because of this, there is a risk that the wager will only cause Iran's atomic program to suddenly become highly secretive--that is, until the weapon is finished.
If the U.S. already has high incentives to stop Iran from getting atomic weapons, the additional $20 billion won't matter. If the U.S. does NOT already have high incentives to stop Iran from getting atomic weapons (in other words, if it doesn't care all that much) it may as well let them get the weapons and not lose the money too.
Under the hedge scenario (i.e., the U.S. bets ON Iran getting the weapons), if Iran gets the weapons, at least the U.S. makes $20 billion on the deal. Also, say the U.S. targeted the $20 billion offer - say it only takes bets from Iranian citizens. This would be equivalent to paying a reward for preventing Iran from getting the bomb. Among the people to take the U.S. up on the bet could, in theory, be the people who can do the most to prevent the outcome for the lowest cost.
Under my idea the U.S. wins money if Iran does not test and pays money if Iran does test. This makes it more believable that the U.S. will take action to stop Iran from acquiring atomic weapons.
The U.S. has the military power to stop Iran from getting atomic weapons. (At the very least we could burn down all their cities.) If Iran knew that we would do whatever it took to stop them then they would probably not try to build atomic weapons and we would never have to use force against them. Unfortunately, Iran probably believes that if they do try to build atomic weapons, there is a high chance we will do nothing. If, however, the U.S. bet $20 billion against Iran testing atomic weapons it would increase our incentives to stop them and so make Iran think it more likely that if they did come close to acquiring atomic weapons we would indeed take military action against them. The bet, therefore, increases the chance of the U.S. receiving our best outcome which is Iran does not get atomic weapons and we don't have to use force against them.
Wouldn't the government want to do the exact opposite -- announce that it will take bets that Iran will not test a weapon? Thus it hedges its own position and helps create more constituencies against the test. (What am I missing?)
A tradeable market of that size would be enough to involve quite a few people to get involved in the outcome. I'm picturing multiple small wars and skirmishes caused by the added financial interests.