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Social Escrow

How should we pay for projects or infrastructure, such as light houses or public radio, whose costs can't be charged to individual users? (Free-market enthusiasts may favor coin-operated light-houses, but even if you hire someone to drop in a coin when your ship is scheduled to arrive, you may inadvertently protect some business competitor passing by at the same time.) Assume that the general public (by which I mean the major campaign contributors that effectively control the government; more on this in a later post) is unwilling to fully fund the project through taxes.

For example, suppose there are ten thousand people who really want the local public radio station to buy a new $500,000 transmitter. Each is willing, in principle, to pay the $50 apiece it would cost. But no one is willing to donate unless sure that enough others will also donate for the transmitter to actually get built. What to do?

One innovative solution has been pioneered by a web site called Pledge Bank. People promise to do something, contingent on X other people making the same pledge. The threshold number for most of their pledges seems rather arbitrary. For example, will 6 letters to George Bush asking him to "save the planet" or 22 people using Open Office have much greater impact than 3 letters or 11 people (i.e., none at all)?

Pledge Bank claims that 75% of people do follow through on financial pledges, but there’s no enforcement mechanism. I bet most would honor a $10 pledge, but might have second thoughts about a $50 pledge or a $500 pledge, depending on income. This would be especially true if someone could plausibly say either "they'll have enough money without my contribution" or "even if I honor my pledge, enough others won't that the project won't get completed."

A wide range of problems similar to this might be solved by what I call "social escrow", by analogy with escrow agencies that help with real-estate transactions.

A social escrow agency would accept contributions from a large number of people, keeping those contributions in trust until certain conditions are met. For example, the agency could accept checks designated for a particular purpose requiring a specified amount of money. The agency would keep the checks until the financial goal was reached (e.g., $500,000 for the new transmitter), then turn the checks over to the designated organization (e.g., the public radio station). If the goal isn’t reached by a specified date, the checks would be destroyed, leaving the money in the potential donors accounts. I suggest that this “money-back-unless-success" guarantee would make people more willing to donate.

A business called Fundable is offering to handle such transactions for a 7% fee. Maybe, if the idea catches on, competition among social escrow agencies will drive down fees (possibly to zero, if pledged money can be put in an interest-earning account) and spur innovation. For example, additional conditions could be imposed on the recipient -- Fundable just hands over the money to the group leader -- such as a public radio station reducing the amount of on-air fund-raising.

Alex Tabarrok has proposed something called a "dominant assurance contract" whereby people making pledges would receive a bonus if the pledge drive fails. In effect, people pledging would bet on failure of the pledge drive. But because this would be such a tempting bet (either you get a stronger radio signal or free money), lots of people would pledge, the drive would succeed, and the social escrow company wouldn't have to pay the bonuses.

I will discuss further variations on social escrow in a later post.

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