This talk will span two papers on the private provision of public goods. First, we’ll hear about Public Goods, then about potentially better models for crowdfunding.

The Public Good Problem

• Public Goods are a market challenge (not failure.) When it comes to a good that is truly in the commons, the rewards are shared equally, but the costs are not necessarily.
• There are two main problems that prevent individuals from pitching in towards public goods:
• The Free Rider problem: if others are contributing, and you’ll reap the public reward even if you don’t, and doing so would cost you something (money, time) then maybe you won’t bother…
• The Assurance Problem: You’re worried that if you contribute when other people do not, then your contribution is wasted.
• A case study: Averting a flood. The best outcome for a threatened town would be for everyone to pitch in hauling sandbags, but individual incentives may lead to some not contributing, which would prove fatal.
  • The Free Riders are thinking “eh, everyone else will help to save the town, I can skip it.” The Under Assured are thinking “man, if people don’t show up I’ll be out there stacking and working and STILL die in the flood!”
  • How can we change the rules to get more people to play?
  • The town’s mayor announces that helpers will meet at town hall and work will begin only if enough people show up to avert the flood (We’ll call this an Assurance Contract). This Assures all the helpers that their contributions won’t be in vain, but we still have a Free Rider problem. Altruism and social pressure help but may not be sufficient to get the people out.
  • So, the mayor announces that work will only happen if EVERYONE helps. This effectively eliminates free riders: if you don’t help, nothing will happen and your place is toast along with the town. It also provides assurance your efforts won’t be wasted. It does leave open an outcome where nobody helps and everyone loses though.
  • What to do?
    
    

Better Crowdfunding

• Crowdfunding sites like Kickstarter use the Assurance Contract illustrated above quite successfully, but there’s a looming question: most projects fail. Why?
• Certainly, there are some bad projects that simply don’t warrant funding, but there are plenty of perfectly good projects failing, too. This seems to point at too many of the “nobody pitches in and we all lose” scenarios playing out.
• What can be done?
  
  

The Dominant Assurance Contract

• The Dominance Assurance Contract is a stronger form of the Assurance Contract with an added feature: refund bonuses. Those who chip in to projects that don’t get enough support get a “refund bonus” for their trouble.
• This makes contributing always a good move: you either win big with everyone, or you win small with a bonus.
• This boosts participation, which thereby limits the cases where the bonuses are actually needed to be paid out.
• The offer of the bonus does the lifting, not the bonus itself, much like bank insurance prevents bank runs with peace of mind.
• The questions then:
  • How should refund bonuses be paid?
    • Fixed amount?
    • Proportional to contribution?
  • When should refund bonuses be paid? Should they be paid to everyone or only to early contributors?
  • It sounds great in theory. Does it work in practice?
    
    

To The Laboratory Experiments!

• Alex has been running different crowdfunding experiments in the lab: simulated crowdfunding with groups of subjects playing with real money so as to give them some skin in the game. Many variations of refund schemes are represented: no refunds, large refunds, small refunds, refunds for early funders, refunds based on funding amount, etc.
• What they found:
• ANY refund increased project success by +20 percentage points across the board. The different schemes have some variation, but consistently better results.
  
  
  

• Early contributors are important! It seemingly inspires others to fund. You can predict the success of a Kickstarter campaign with 85% accuracy after only 15% of their duration.
• Refund bonuses paid only to early contributors was the most successful scheme: more early successes and more total successes than any other method.
• Why do refund bonuses work? They make each potential contributor pivotal earlier, meaning the contribution point where a particular contributor would find it profitable to push the project over the threshold.
• “By making people aware of their pivotalness earlier, there is a bonus to the early refund bonus”
• In theory, refund bonuses are never paid: in reality, refund bonuses get paid ~33% of the time. So entrepreneurs must balance their bonuses paid out against their profits!

Other Approaches

• “Liberal Radicalism” (https://arxiv.org/pdf/1809.06421.pdf) from Vitalik Buterin, Zoe Hitzig, and Glen Weyl brings Quadratic Voting into the mix and takes a completely different approach to funding public goods, effective in potentially different contexts.
• Dominant assurance contracts work when you know what the public good is and you just need people to contribute. Quadratic funding is good to discover the public goods that people want and get them funded, but it does require outside investment.
• Generally, mechanisms like Refund Bonuses, Dominant Assurance Contracts and Quadratic Voting can provide tools to entrepreneurs to unlock the market’s ability to create public goods, instead of dealing strictly with charitable or governmental activities.