Understanding Social Impact Bonds and Their Alternatives: An Experimental Investigation
Experiments in Organizational Economics
ISBN: 978-1-78560-964-0, eISBN: 978-1-78560-963-3
Publication date: 18 December 2016
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 inputs-based 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.
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Acknowledgements
Acknowledgement
We thank seminar audiences at Monash University, UNSW, CERGE-EI, University of Heidelberg, University of Passau, University of Amsterdam and WissenschaftsZentrum Berlin for questions and suggestions. We are particularly grateful to Chris Bidner for an excellent discussion of an earlier version of the present manuscript, two referees for this volume of REXE, and its editors for constructive comments and excellent guidance. We also acknowledge gratefully the funding that was provided through the UNSW Business School and its small-projects funds program.
Citation
Wong, J., Ortmann, A., Motta, A. and Zhang, L. (2016), "Understanding Social Impact Bonds and Their Alternatives: An Experimental Investigation", Experiments in Organizational Economics (Research in Experimental Economics, Vol. 19), Emerald Group Publishing Limited, Leeds, pp. 39-83. https://doi.org/10.1108/S0193-230620160000019011
Publisher
:Emerald Group Publishing Limited
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