Understanding social impact bonds and their alternatives

an experimental investigation

Jade Wong, Andreas Ortmann, Alberto Motta, Le Zhang

Research output: Chapter in Book/Report/Conference proceedingChapter

2 Citations (Scopus)

Abstract

Policymakers worldwide have proposed a new contract - the 'social impact bond' (SIB) - which they claim can allay the underperformance afflicting not-for-profits, by tying the private returns of (social) investors to the success of social programs. We investigate experimentally how SIBs perform in a first-best world, where investors are rational and able to obtain hard information on not-for-profits' performance. Using a principal-agent multitasking framework, we compare SIBs to inputsbased contracts (IBs) and performance-based contracts (PBs). IBs are based on a piece-rate mechanism, PBs on a non-binding bonus mechanism, and SIBs on a mechanism that, due to the presence of an investor, offers full enforceability. Although SIBs can perfectly enforce good behaviour, they also require the principal (i.e., government) to relinquish control over the agent's (i.e., not-for-profit's) payoff to a self-regarding investor, which prevents the principal and agent from being reciprocal. In spite of these drawbacks, in our experiment SIBs outperformed IBs and PBs. We therefore conclude that, at least in our laboratory test-bed, SIBs can allay the underperformance of not-for-profits.

Original languageEnglish
Title of host publicationExperiments in organizational economics
EditorsSebastian J. Goerg, John R. Hamman
Place of PublicationLondon
PublisherEmerald Group Publishing
Pages39-83
Number of pages45
ISBN (Electronic)9781785609633
ISBN (Print)9781785609640
DOIs
Publication statusPublished - 2016
Externally publishedYes

Publication series

NameResearch in Experimental Economics
PublisherEmerald Group Publishing
Volume19
ISSN (Print)0193-2306

Keywords

  • Input-based contracts
  • Not-for-profit
  • Performance-based contracts
  • Principal agent
  • Social impact bonds

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