Working Paper: CEPR ID: DP17214
Authors: Daniel Tortorice; David Bloom; Paige Kirby; John Regan
Abstract: Social impact bonds (SIBs) are an innovative financing mechanism for public goods.In a SIB, an investor provides capital to a service provider for a social intervention. Theinvestor receives a return from the government based on the outcome of the interventionrelative to a predetermined benchmark. We describe the basic structure of a SIB andprovide some descriptive statistics for these financial instruments. We then consider aformal model of SIBs and examine their ability to finance positive net present valueprojects that traditional debt finance cannot. We find that SIBs expand the set ofimplementable projects if governments are pessimistic (relative to the private sector)about the probability an intervention would succeed or if the government is particularlyaverse to paying costs associated with a project that does not generate offsettingbenefits. As various public programs include both these features, we conclude thatSIBs are a real innovation in public finance and should be considered for projects whentraditional debt finance has been rejected.
Keywords: public goods; fixed income securities; impact investing; social impact bonds
JEL Codes: H41; P16; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social impact bonds (SIBs) (O35) | ability to finance projects with positive net present value (G31) |
| government pessimism about project success (H43) | use of social impact bonds (SIBs) (O35) |
| use of social impact bonds (SIBs) (O35) | reduction in government’s risk of incurring unfunded costs (J32) |
| existence of optimistic investor (G40) | influence on government financing decisions (E62) |
| government aversion to costs without benefits (H11) | use of social impact bonds (SIBs) (O35) |