FAQs

Frequently Asked Questions

Does anyone actually issue Social Policy Bonds?

Not yet (March 2008). Some private bodies in the US and Australia are thinking about it. Governments are more wary, but there is some interest at the officials' level.

 

What do people think of the bond concept?

Many economists are intrigued. In early 1997 I received this letter from Professor Robert Shiller, Professor of Economics at Yale University, about the Social Policy Bond concept. He mentions Social Policy Bonds in his book The New Financial Order. More recently, Robert Hahn and Paul Tetlock mention Social Policy Bonds in their paper Using information markets to improve public decision making. That paper and my comments on its treatment of the bond concept are available here.

 

Who would buy the bonds?

The most important buyers would be institutions, who would buy many of the bonds, and use the profits they anticipate from early redemption as collateral to finance projects that would help achieve the targeted social objective.

 

Wouldn't people just buy Social Policy Bonds, then do nothing?

If enough people did nothing, the value of the bonds would fall, as the targeted objective became ever more remote. At some point, the market price of the bonds would fall to such a low point, that it would pay somebody to buy the bonds, and do something to help achieve the targeted objective.

 

What happens if Social Policy Bonds are held by many different holders? That would mean that bondholders might be tempted to do nothing, or that they are not rewarded in proportion to their efforts.

If too many Social Policy Bonds were held by would-be free riders who had no intention of doing anything to help achieve the targeted social objective, then the value of all the bonds would fall. This would lead to aggregation of bond holdings, so that most bonds would be held by relatively large owners. They would then have incentives to cooperate with each other. This would mean, amongst other things, that they would all benefit by agreeing on how the specified social problem could best be targeted. One element of the optimal strategy will be to decide who will be responsible for what activities, and how they shall be compensated. Major bondholders will certainly have incentives to share information with each other. Many of the bonds would be traded between bondholders.

 

But what about those with smaller holdings?

Some might think that holders of bonds representing, say, 5 per cent of all the bonds issued would be deterred from taking actions to help achieve the targeted objective because they will not be the sole beneficiaries of appreciation in the value of the bonds. First, typically people do take actions that will enrich others as well as themselves. Minority shareholders and company managers, for instance, frequently initiate actions that will see major shareholders benefit far more than themselves. They might try to accumulate more shares in anticipation of their own activities, but this activity certainly does not inhibit initiatives aimed at increasing share prices. Second, the important criterion for bondholders is whether their investment in objective-achieving activities will generate a sufficient return to themselves. They will not be deterred if their activities also benefit others. Of course, if their activities are successful in achieving a specified objective, then other bondholders may replicate them, so raising the price of the bonds significantly. Third, minority bondholders could use futures or options markets, so that they would enjoy a leveraged return if their activities are successful in raising the bond price. 

 

 

What happens when a targeted objective has actually been achieved? Wouldn't more bonds have to be issued to maintain the status quo?

For the bonds to be redeemed, the achievement would have to be sustained for a specified period. After that period, it is likely that the most successful and efficient systems developed to solve the social problem the first time will allow government to allocate less funding for maintaining or improving the new status quo. The bonds encourage diverse and efficient solutions to social problems.

 

Could the bonds really solve such global problems as war, famine, disease and environmental disaster?

Once the bonds have been successfully used at the national level, there would be every reason to apply the principle to global problems. The thrust of the concept is to give people incentives to solve targeted problems. Too many global resources are wasted on corrupt or inefficient governments who have no real incentive to help solve global problems. Social Policy Bonds can undermine, co-opt, or distract those who are opposed to social goals. 

Policy as if outcomes mattered