The Government as Venture Capitalist

Some state and local governments are experimenting with new pay-for-performance contracts – sometimes called social impact bonds (SIBs) – to promote social innovation. In a SIB, the government contracts with an outside provider to achieve a measurable social goal (like reducing recidivism among juvenile offenders), private impact investors finance the program’s upfront costs, and the government promises a return to them if the program’s targets are achieved.

Recently, the Obama administration to catalyze federal pay-for-performance contracts. Several existing federal programs like the and the are supporting the growth of impact investing funds. According to a , impact investing in the US would not exist without the support of and partnership with the federal government through grants, loans, and guarantees.

Metrics are an essential feature of pay-for-performance contracts, and must be an essential feature of all government programs. This is mostly not the case today, but the situation is improving as the Obama administration links more of its spending to evidence of success, and as non-profit groups, like , develop sophisticated new techniques to evaluate government programs.

With the government acting as a venture capitalist, the private sector can create effective new programs to address social problems. But scaling up these programs will require government resources. The Gates Foundation may devise breakthrough innovations for public schools; but, even with its billions of dollars, it lacks the resources to revitalize education at the national or even the state level. As former New York City Mayor Michael Bloomberg , philanthropists should test innovative policy ideas and then rely on government money to implement them widely.

Only governments can provide public goods and address social challenges on a national scale. But there are numerous ways in which governments can work with non-profits, investors, businesses, and citizens to find the best ways to achieve these goals – and thus restore public trust in government itself.

Laura Tyson, Chair of the President’s Council of Economic Advisers under Bill Clinton, is Professor of Global Management at the Haas School of Management, University of California at Berkeley.

Copyright: Project Syndicate, 2014.