Looming L-Train Shutdown in New York
Example Use Cases of Prediction Markets
Prediction markets are an invaluable prognostic tool that collates expert insight through a system of financial incentives to surface and aggregate salient information about the likelihood of a given outcome or event.
Gnosis’ prediction market platform is uniquely positioned to drive innovation in a range of applications that are pertinent to both global and local economic systems — including finance, insurance, and price discovery. The Gnosis platform also provides the underlying incentive mechanisms for more advanced applications of prediction markets such as distributed and market-based governance protocols.
The range of use cases for prediction markets is vast, and the purpose of this series is not to cover each in detail, but rather to highlight a few instances in which prediction markets might prove particularly beneficial. Enjoy the read!
Hurricane Sandy landed in October 2012. The category 3 superstorm decimated infrastructure and communities in the Caribbean and the Eastern coastline of the United States. The New York City metropolitan area was especially hard hit.
Sandy’s storm surge flooded the 100-year-old Canarsie Tunnel and other subway tunnels under the East River with salt water, corroding essential cabling, power infrastructure, and railway track equipment. The city’s Metropolitan Transportation Authority (MTA) said the destruction caused by the storm was the worst disaster in the 108-year history of the New York City subway system. In order to make critical repairs, the MTA announced that — beginning in April 2019 — the L-Train subway line between Manhattan and Brooklyn would be shut down for a 15 month period.
With a daily weekday ridership of 225,000 passengers, the L-Train is an integral part of New York’s public transportation system. Shutting it down for more than a year will undoubtedly cause massive disruptions to the housing and business markets, and potentially even to the political landscape of the city.
Although the Department of Transportation (DOT) and the MTA have put forth a comprehensive plan to curtail the negative impacts, the L-Train shutdown is still a constant source of anxiety among some New Yorkers. Many fear that despite the MTA’s vows to keep the project on schedule, the crucial link between Manhattan and Brooklyn could remain closed much longer than initially planned.
Could a prediction market be helpful in predicting the reopening date of the L-Train, thus mitigating some of the negative consequences of the closure?
To answer this question, it’s first important to consider who the main players are in the project:
- The MTA — the entity in charge of the project.
- Judlau Contracting and TC Electric — the two contracting companies chosen by the MTA to carry out the rehabilitation work.
- The boroughs of Manhattan and Brooklyn as well as the Mayor of New York City and the state government, who have an acute interest in keeping the shutdown of one subway line as short as possible.
- Residents of New York City — in particular commuters between Manhattan and Brooklyn whose lives would be adversely affected by the disruptions caused by the closure.
- The L-Train Coalition — a group of stakeholders, community organizations, businesses and concerned citizens who are looking to maintain an open dialogue with the MTA throughout the repair process.
- The Riders Alliance — a grass-roots membership organization of subway and bus riders dedicated to achieving better transit in New York City. The alliance has worked with commuters and community groups to identify new transit options for L-Train riders during the shutdown.
Who could be interested in creating and funding a prediction market, and who wouldn’t?
Advocacy groups like the Riders Alliance and the L-Train Coalition might have the greatest interest in creating such a prediction market. Their members include both ordinary citizens as well as strong investors like companies or wealthy individuals whose financial support could help fund the market with initial liquidity.
The contracting companies Judlau Contracting and TC Electric would also benefit from the creation of a prediction market. Both firms are facing massive political and financial pressure from New York residents and the MTA. Judlau Contracting has even agreed to fines of $410,000 a day if they exceed the July 2020 completion date. A prediction market would help these firms by surfacing information and potentially aiding in the identification of barriers to swift project completion. Both companies, who could theoretically game the market in their favor by deliberately slowing or accelerating progress, would be strongly disincentivized to participate in the market for risk of massive legal recourse. Therefore, the integrity of the prediction market would be maintained.
Likewise, the MTA and the Mayor’s office — who represent the public face of the project and would be blamed in the case of delays — also have substantial reason to fund a prediction market. Both public entities face massive political pressure to complete the project on schedule. A prediction market would aggregate disparate information and provide both the Mayor’s office and the MTA with a metric of certainty that the project would be completed on time. They could then use this information to temper public expectations or exert pressure on the contracting companies to speed the repair process.
Who would participate in the prediction market?
Many construction projects happen in accessible or at least visible public spaces. In principle, their progress can be witnessed and judged by anyone passing by. This is not the case for tunnel repair works as the construction site will be inaccessible and hidden from public view. Therefore, the workers sent by the contractors and the MTA are essentially the only ones who can reliably report on their progress and determine whether they are on schedule. For this reason, workers would be incentivized to reveal their superior knowledge about the project’s progress in the prediction market.
New York’s commuters, enterprises, and housing companies based along the train route might also be well-informed regarding the project’s progress and therefore have a financial incentive to trade in the prediction market.
What are the socio-economic implications of the outcome?
Large-scale construction projects are notorious for delays and soaring costs — in the US and elsewhere in the world. Prediction markets have the potential to increase pressure on the respective authorities to do a better job and give the public an honest assessment of what to expect if they fail to deliver.
Major construction projects affect many layers of society and the economy alike, in particular, the housing and business market as certain areas can become less popular due to poor accessibility. This, in turn, has a big impact on the development of the area concerned as companies might not open new headquarters in places with poor infrastructure or even relocate existing sites. Fortunately, these social and economic costs could be minimized through the information surfacing capability of a prediction market.
While the economic loss due to the L-Train shutdown is the most troubling consequence, there’s also always a political facet to controversial construction projects. Political mismanagement that leads to a long-term traffic collapse with all its negative implications could easily cost the Mayor of New York his job.
The L-Train shutdown comes along with environmental implications, as well. Some fear that traffic might collapse on alternative routes. Arthur Schwartz, a labor lawyer and resident who leads a coalition of neighborhood organizations opposed to the MTA and DOT’s shutdown mitigation plan, told the real-estate blog Curbed: “People are concerned about having traffic jams in front of their homes 24 hours a day and the resulting air and noise pollution.” Therefore, keeping the project on schedule would also reduce air and noise pollution due to combustion on alternative routes.
Conclusion
A prediction market that aggregates all available information on the project’s progress would add transparency to a process that is, quite literally, obscured from public view. It could even help keep the project on schedule and make the outcome more projectable by putting additional pressure on the contracting companies as well as the political parties involved.
Major public works projects, in general, could benefit strongly from the aggregation of information provided by prediction markets. The parties in charge of these projects would be encouraged to communicate an honest and realistic reopening date to the public. As a result, residents and businesses would gain certainty as to how long they have to deal with the disruptions caused by the shutdown. Because, despite some very different interests, there should be one guiding principle that most stakeholders agree on: If delays are inevitable, it’s better to know and prepare for them in advance rather than panicking and producing excessive costs when things get out of hand.
Thanks to Eric Gorski, Nadja Beneš, and Kei Kreutler.
