The frontier of social impact finance in the public sector: Theory and two case studies

Social impact bonds (SIBs) are a novel and innovative form of public-private partnership financing social services performed by a best-practice selected non-governmental third entity. In our paper we outline a SIB theoretical model identifying government and private investors' participation constraints and we discuss the conflicts of interests that may arise among the different actors involved in presence of asymmetric information. We apply our theoretical model to two investment cases concerning contrast to jail recidivism and health budget project. We show conditions for viability of the SIB scheme in both cases under reasonable parametric conditions, provide sensitivity analysis on crucial parameters, and calculate participants' payoffs under different assumptions.