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

ABSTRACT

Transaction cost economics is applied in this paper to social impact bonds to explore how public service commissioners could improve outcomes-based contracts. The authors 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, the authors suggest that commissioners aim for a ‘requisite’ contract: one that minimizes opportunism while balancing the costs of developing a more robust outcomes specification.

IMPACT

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.

KEYWORDS:

• Outcomes-based commissioning
• payment-by-results
• public service contracting
• social impact bonds
• transaction costs

Acknowledgment

Established in July 2016 as a partnership between the UK Department for Digital, Culture, Media and Sport and the Blavatnik School of Government at the University of Oxford, the Government Outcomes Lab (GO Lab) is a centre of academic research and practice for outcome based contracting and social impact bonds.

Disclosure statement

No potential conflict of interest was reported by the author(s).

ORCID

Clare FitzGerald http://orcid.org/0000-0002-1021-8041

Eleanor Carter http://orcid.org/0000-0001-5774-7728

Ruth Dixon http://orcid.org/0000-0002-2177-609X

Mara Airoldi http://orcid.org/0000-0002-2781-9628