Grouponing the government
"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.
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