Association for Public Policy Analysis & Management

Social impact bonds are a recent innovation in social finance that “…integrate philanthropy, venture capitalism, performance management, and social program finance into an innovative new mix.”  In a typical social impact bond (or pay-for-success) arrangement, a public entity enters into a contract with private sector parties to provide a social intervention (e.g. a program to provide job training to youthful offenders).  Payments are made to the private parties – which include both for-profit and non-profit organizations – only if the intervention provides sufficient, documented cost savings to the public entity (e.g. reduced public costs associated with re-offending). 

 Our review of the extant literature—academic studies, government and private reports, and business press—suggests a need for systematic exposition of the benefits, costs, risks, and safeguards for various involved parties in social impact bond schemes. Our  proposed study will examine social impact bonds using the theoretical grounding of contract theory.  Our primary research question is—how can social impact bonds, as multi-party contracts, balance multi-party interests and also achieve social goals?  To explore these questions,  we will use analytical perspectives and frameworks from three schools that dominate the field of contract economics: incentive theory, incomplete contract theory, and transaction cost theory. We also will present a case study of the degree of risk sharing among public and private parties for a social impact bond arrangement recently implemented by the state of Massachusetts in the United States.