Contracting (Incompletely) for Success: Designing Pay for Success Contracts for Social Impact Bonds (SIBS)

More than two dozen social impact bonds have been launched in the United States since the first was contracted by New York City in 2012. Dozens more of these transactions are in progress across the United States, and more are likely to come prompted, at least in part, by the Social Impact Partnerships to Pay for Results Act (SIPPRA) of 2018. As the number of social impact bonds has grown, the architecture of the pay for success contracts that undergird social impact bonds is starting to take recognizable form in the United States. What explains the design of these pay for success contracts and where are they heading next?

Nobel Laureate Oliver Hart's work in developing a theory of incomplete contracting is relevant to understanding the design of the pay for success contracts that were developed for the first social impact bonds launched in the United States from 2012 through 2017. Not only does this theory explain why many of these early transactions include contractual governance and oversight structures, but it also points to how future pay for success contracts used for social impact bonds might develop and standardize as private and public actors gain more experience with contracting for successful social or environmental outcomes.