Grant-Maximizing but not Money-Making: A Simple Decision-Tree Analysis for Social Impact Bonds

Abstract

Social impact bonds (SIBs) are a form of impact investing that challenge traditional investor and government rationalities in financing or funding social services. SIBs are often presented optimistically as a self-evident ‘win-win’ for public commissioners and potential non-governmental investors in public services. While the use of SIBs has grown recently, SIBs have not been used as extensively as many proponents expected, raising questions around whether investor and government interests can be adequately aligned. A decision tree is developed that explains why SIBs may not appeal to investors and governments as much as initially hoped by their proponents, specifically addressing the value of SIBs in relation to alternative investments available to governments and investors. The decision tree shows that SIB-financed initiatives that are rational choices for governments are unlikely to be attractive to investors (and vice versa). This explains the ‘SIB paradox’ and why it has proved difficult to create a vigorous investment market for SIBs. This issue remains even where efforts are made to reduce transactions costs or investor risk in SIB-funded initiatives. The analysis also suggests that SIBs may offer philanthropic and charity funders rather than private investors a way to make the most of their limited granting capital.

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