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Posted at 2:41 PM ET, 02/10/2011

Grouponing the government

By Ezra Klein

"If not enough people express interest, the deal dies. No coupons are issued, and nobody’s out a cent. Groupon is, therefore, a huge win-win-win."

That's David Pogue, explaining how the new generation of social-coupon Web sites work. But it's also a good description of the "pay-for-success" funding model the Obama administration is hoping to include in the next budget. Perhaps even the right description.

The underlying idea of pay-for-success is also the underlying idea of Groupon: By limiting downside risk to zero, you free both the customer and the seller to invest more. Groupon get customers to pledge more money because they get their cash back in the event that the money pledged doesn't meet the seller's requirement and the deal never activates. This in turn frees the seller to offer a better deal because they can be assured of the volume and new customers necessary to make the venture worthwhile. Their only risk is they did the math wrong.

The pay-for-success bonds, at least in theory, work very similarly: They get taxpayers to pledge more because they pay nothing if the project fails, and gets private actors to invest more because they get paid back in full -- plus a big bonus -- if the project succeeds. The only risk for the private actors is that they estimated the project wrong and it won't work.

By Ezra Klein  | February 10, 2011; 2:41 PM ET
 
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Comments

I think you underestimate the 'only' in the last sentence. If the problems to be solved were easy, the free market would have figured out how to solve them (and make money in the process). But since the problems are hard, estimating what is needed to solve them becomes very risky. Seems like this is a solution that is just shirking responsibility for solving hard problems; well since some private entity cannot figure out how to make money solving the problem (or at least identify the costs involved with adequate certainty), it must be unsolvable and so we shouldn't try and solve it.

Posted by: gpw123 | February 10, 2011 2:50 PM | Report abuse

* Seems like this is a solution that is just shirking responsibility for solving hard problems; well since some private entity cannot figure out how to make money solving the problem (or at least identify the costs involved with adequate certainty), it must be unsolvable and so we shouldn't try and solve it.*

I don't think that the argument is that it's unsolvable. The argument is that since it's hard and we don't know how to solve it, we need to come up with some way of creating incentives to fund as many different ideas as possible to find the one that works.

Posted by: constans | February 10, 2011 3:00 PM | Report abuse

It's more nuts ideas by people who don't know how to think. There are incentives in the market, galore, and bigger potential payoffs than possible under any government scheme. And, I daresay, the real devil will be in the fine print of the prize offering. I'd be very surprised if the government didn't claim the rights to any invention in exchange for the prize money, turning a potential lifetime of income into a one shot payoff. If, however, the inventor is granted the prize money, and gets to keep all rights, then the taxpayer is hosed.

Posted by: msoja | February 10, 2011 4:11 PM | Report abuse

My guess is that either the committment in dollars will be too small to make an impact, or that the bureacy required to implement the program will be too cumbersome.

A better solution is the functional equivalent of DARPA they have running right now in the energy field (name escapes me) which is highly competitive, and headed by an Indian_American from MIT, whose name I also can't find right this second.

This was an unsatisfactory post, I know!

Posted by: johnmarshall5446 | February 10, 2011 4:31 PM | Report abuse

What an article!! Best place to print coupons of major brands is called "Printapons" search online for Printapons

Posted by: gracedellis | February 11, 2011 2:21 AM | Report abuse

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