15 June 2012

Incentives to offer incentives

Social Policy Bonds inject incentives into every stage of every process needed to achieve a social goal: the bonds are tradeable, which means they are worth most to those who believe they can do the best job of achieving social goals most efficiently. If someone else thinks they can be more cost-effective, they will bid more for the bonds, and buy them from less efficient investors. The incentives under a bond regime cascade down from the bondholders to everybody whom they contract to help achieve the targeted goal. To put it simply: the bondholders have incentives to offer incentives to everybody who works for them.

This is the opposite of the current system where, if we have a large organisation within which some people experiment and find an improved approach, the system itself doesn't supply sufficient incentive to propagate that approach. So, the current Economist, discussing a successful innovation shown to work in one of the many hospitals run by UK's National Health Service:

[T]he main reason innovations do not spread is that the NHS has no mechanism for ensuring they do, or for rewarding the inventive. The service is centrally funded and emphasises the universality of its care rather than its results. Such a system is likely to prove better at controlling costs than at encouraging good ideas to thrive. From petrol to prescriptions (subscription) the 'Economist', dated 16 June

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