Social Policy Bonds and free-riding

In my work on Social Policy Bonds I’ve tried to make the concept accessible and so haven’t emphasised the versatility and other advantages that variants can bring to the concept. One such is time binding: in other words, making redemption conditional on the targeted social goal being achieved by a specific date. Time binding would on its own reduce the market value of Social Policy Bonds, and increase the proportional payouts for early achievement of the targeted social or environmental outcome. I think it would also have the effect of deterring still further would-be free riders: Social Policy Bonds could be issued that target, say, achievement of a 99 per cent literacy rate for children aged 11 in the UK. But if the issuers anticipated too much free-riding, they could stipulate that they would redeem the bonds only if the target rate were achieved within, say, five years. Would-be free-riders then would be holding a wasting asset, whose value as the target becomes more remote would decline even faster than if there were no specified time limitation.

There are other reasons, which do not depend on time binding, for believing that free-riding would be a self-cancelling activity: assume that most of a particular issue of bonds were held by would-be free riders. Then very little, if anything, would be done to help achieve the targeted objective. As the objective became more remote, the value of all the bonds would fall. And as the bonds lost value, they would make a more attractive purchase for people who were prepared actively to help achieve the targeted objective. So free riders would be tempted to sell, even at a loss, rather than see the value of their bonds continue to fall. Some history of falling bond prices would tend to make free riding on Social Policy Bonds less appealing with future issues.

Free-riding, in my conversations with economists, always seems to loom large in their doubts about the Social Policy Bond concept. But for the reasons given here, and for others that I mention in my longer work, I don’t think it would be a serious problem.