Re: Social Policy Bonds -- Attn: Robin Hanson

From: Robin Hanson (
Date: Fri Jan 19 2001 - 12:59:13 MST

On 1/18/2001, steve vs wrote:
> Interesting suggestion.
>Negotiable governemnt bonds redeemable when certain objective
>measures are met. Do any of our resident experts have an opinion?

Steve and Will -- Ronnie wrote me last April, after Will told him
about me, and his message to me got buried in my inbox, so I never
responded. I'm sorry to have been so anti-social.

Here's your idea:
>Social Policy Bonds would be issued by government, and would be redeemable
>for a fixed sum only when the specified social objective has been achieved.
>Once issued, the bonds would be freely tradeable on the open market. Owning
>bonds that can appreciate in value when a social goal becomes closer gives
>the bondholders an incentive to try to achieve that goal. Under a bond
>regime bondholders would be free to choose and invent ways of solving social
>problems that are cost-effective and efficient. ... passive investors ...
>'free-riders', hoping to benefit from any increase in the bond price without
>actually participating in any objective-achieving projects. But ... the more
>bonds these passive investors own, ... the more they would stand to lose ...
>they would be better off selling them, even at a loss. ... a big incentive
>for large purchasers to buy the bonds. ... and large purchasers would have a
>strong incentive to cooperate, to help achieve the targeted objective ...

It is true that if someone holds enough such bonds, they can have an incentive
to achieve the social policy. But I have four concerns about this proposal:
1) The bondholder needs to have private information about their chances of
    success. If speculators know as much as the bondholder does about the
    chances of success, the bond price would get bid up to a value consistent
    with those chances, and the bondholder couldn't make any profits by
    pursuing success. The key to bondholder profits is to *both* be able to
    help achieve the social policy, *and* to know better than speculators how
    hard one will try or how successful one may be. So this approach shouldn't
    be used if one wants success with a high probability.
2) For every buyer there is a seller. While a buyer has an incentive to
    help the social policy, the seller has an incentive to hurt that policy.
    And the seller can profit from that ability if they also have private
    information about how hard they will try or how successful they will be.
    Now if the government just sells it once to the final bondholder, we only
    have to worry about giving the government incentives to hurt the policy.
    But the more other sales happen after that the more worries about harm.
3) You'd need to issue extremely large dollar amounts of bonds to have any
    measurable effect on large policy goals, such as your example of regional
    air pollution. There is no point in trying a small amount at first on big
    goals - you'd have to first try it on very small goals.
4) Choosing the amount of bonds to issue is tricky, and open to corruption.
    Imagine a town with one main factory causing pollution, and issuing bonds
    whose goal is reduction of town pollution. Issue too few and nothing will
    happen. Issue too many and pollution will fall, but you will have paid
    that company much more than you needed to to achieve the goal. And the
    fact that uncertainty is key as described in point 1 means that uncertainty
    about whether one offered too much or too little may be endemic.

>Social Policy Bonds allow governments to do what they are best at -
>prescribing ends - and markets to do what they are best at - allocating
>resources to meet these ends

I have a different proposal based on this intuition at

Robin Hanson
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323

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