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Tying the Hands of the King: Impact Investment as a Commitment Device for Governments

Yesterday, I made a pitch to a foundation to fund the development of an adaptation of the Social Impact Bond idea. During the discussion, one of the selection committee asked me, “this bond will lock government in to producing these outcomes for ten years. Do you think that is a good idea?”

I wasn’t expecting such a question, but the role of commitment on the outcomes of government policy has been a concern of mine (see this report for more details). So while I was unprepared, I had definite views on commitment and government policy. So, I replied, “as someone who has worked in government for a while, one of the main problems is that government lacks credible commitment. So, yes, I think it is a good idea for government to be locked in to produce social and environmental outcomes. Otherwise, their priorities will change every three years with a change in government. I think impact investment is a great commitment device. It ties the hands of the King.”

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Social Impact Bonds: Aligning Incentives and Social Impact

You have probably been approached on the street to donate to a social or environmental cause by an enthusiastic spruiker. If you are like me, you are torn between two impulses: one to protect yourself from being ripped off, but the other to help. Because I can’t verify if my donation will actually make a difference, I usually don’t donate. This is an example of what economists call ‘asymmetric information’; the potential donor has little or no information on how their donation may help, whereas the charity organisation holds this information. Because of asymmetric information, people who may want to help do not help because they cannot verify (without incurring high costs) whether or not their donation had an impact. Social Impact Bonds (SIBs) are a way of overcoming this asymmetric information problem. (more…)