Social Impact Bonds: New Product or New Package?

Abstract

This note considers a relatively new form of financing for social services, the “social impact bond. ” Proponents of social impact bonds (SIBs) argue that they present a solution to several problems in funding social services, including performance measurement and the distribution of risk. Using a simple model, we demonstrate that, despite their apparent novelty, social impact bonds in concept need not produce any difference in outcome from standard financing arrangements that allow for private sector social responsibility. We argue that SIBs will lead to greater program success if investors ’ effort can positively influence outcomes, either directly (effort exerted in production) or indirectly (effort devoted to screening), but are unlikely to do so otherwise. We conclude that, as in the more general theoretical literature, the value of this particular application in terms of funding innovation will be strongly context-dependent. 1

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