The Committee of Investments and Financial Services of the Texas State Legislature is currently considering a bill to authorize government agencies to issue Social Impact Bonds (SIB) -- financial tools that allow private investors to provide the resources to implement new or expand existing social programs that benefit not only individuals that receive the services, but also society in general. Rice economists Flavio Cunha and Ken Wolpin are available to discuss this legislation.
Both Cunha and Wolpin are currently investigating the research design that can determine, as accurately as possible, the government agency savings associated with programs that are the focus of SIB contracts.
"Suppose that there is a prenatal home-visitation program currently provided to a small number of disadvantaged families by a nongovernmental organization (NGO) funded philanthropically," Cunha said. "Suppose further that the program has been shown to reduce the likelihood that a child will be born prematurely or will have a severe health problem at birth. While the program benefits these families, it also benefits society at large. Because the program reduces premature births or other health complications, these children will not need costly medical interventions that would otherwise be funded through government-financed programs. Therefore, the program indirectly benefits taxpayers."
In an SIB contract, Cunha said, the government agency expenditures are reduced because the program partners with private investors. These investors provide the resources for the NGO to expand the program, perhaps serving thousands of additional families. The private investors are repaid according to the savings in health expenditure generated by the program. A critical component of an SIB contract is an independent and unbiased estimate of the savings associated with the program.
Cunha and Wolpin propose an approach in which independent evaluators adopt the following guidelines:
The evaluation team identifies the population targeted by the program that is receiving SIB funds from private investors. In the example above, this population is expectant mothers whose family income is below some threshold value, such as the poverty line. The team draws a representative subsample from the target population to be part of a randomized controlled trial. In this type of study, one random set of the subsample will receive the services provided by the program (the “treatment group”) and the remaining families in the subsample will not (the “control group”). For all of the families in the subsample group, both in the treatment and control groups, the investigation team collects data on government expenditures. The evaluation team estimates program benefits (in terms of government savings) by comparing the costs incurred by the random subsample of families in the control group with the expenditures in the treatment group. If the expenditures are larger in the control group, the savings can be shared between the government agency and the private investors.
Cunha said that this approach provides the best way to provide both government agencies and private-sector investors accurate information about the magnitudes of the government cost savings.
"It provides the credibility that is necessary for these types of arrangements to be used as widely as possible and for socially beneficial programs to engage as large a population as possible," he said.
Flávio Cunha is an associate professor of economics at Rice. His areas of expertise are labor economics with special emphasis on human capital formation. For a full bio, visit http://bit.ly/1ItLBR5.
Ken Wolpin is the Distinguished Research Professor and Lay Family Professor of Economics at Rice. His research focuses on the labor market and demographic decisions of households and individuals in dynamic settings. For a full bio, visit http://bit.ly/19OfDn1.
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To schedule an interview with Cunha or Wolpin, contact Jeff Falk, associate director of national media relations at Rice, at firstname.lastname@example.org or 713-348-6775.