NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, February 10, 2011

My column this week describes a new strategy for improving the performance of government programs. In short, private investors – typically foundations – pay the costs of a new program in its early years, and the government later repays the investors, often with a bonus, as long as the program meets its goals. If it fails, taxpayers pay nothing.

In his budget next week, President Obama will propose seven pilot programs, costing up to $100 million, along these lines. He will refer to the financing mechanism as pay-for-success bonds. The British government is already testing such a program, under the name social-impact bonds. (Gordon Brown’s Labour government started the program, and David Cameron’s Conservative government has aggressively adopted it.) The New York City, the state of Massachusetts and other local governments are also considering the idea.

On Wednesday, the Center for American Progress, the Democratic-leaning Washington research group, will release a paper on these bonds. It’s written by Jeffrey Liebman, a Harvard economist and former official in the Obama administration’s budget office.