Walking the contractual tightrope: a transaction cost economics perspective on social impact bonds

In this paper, we supply a framework for assessing the quality of outcomes specifications and clarify the trade-off between a robust value case for government and the transaction costs associated with specifying such a deal. Illustrated by two examples, we suggest that commissioners aim for a ‘requisite’ contract: one that minimises opportunism while balancing the costs of developing a more robust outcomes specification.

Policy-makers and managers are increasingly looking to outcomes-based contracts, including social impact bonds, as a way to improve social outcomes. The success of these contracts is predicated on how well-specified the outcomes are within them. This paper provides practitioners with an easy-to-use framework for assessing outcomes specifications. They need to consider the definition of the eligible cohort; the alignment of payable outcomes to the policy intent; and the accuracy of prices for attributable outcomes. Practitioners should aim for a ‘requisite’ contract—a contract that minimizes service provider and investor opportunism while balancing the costs associated with developing a more robust outcomes specification.