DP17214 A Theory of Social Impact Bonds
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. The
investor receives a return from the government based on the outcome of the intervention
relative to a predetermined benchmark. We describe the basic structure of a SIB and
provide some descriptive statistics for these financial instruments. We then consider a
formal model of SIBs and examine their ability to finance positive net present value
projects that traditional debt finance cannot. We find that SIBs expand the set of
implementable projects if governments are pessimistic (relative to the private sector)
about the probability an intervention would succeed or if the government is particularly
averse to paying costs associated with a project that does not generate offsetting
benefits. As various public programs include both these features, we conclude that
SIBs are a real innovation in public finance and should be considered for projects when
traditional debt finance has been rejected.