In 1998, I designed the “dominant assurance contract” (DAC) mechanism for producing public goods privately. In my latest paper, just published in GEB written with the excellent Tim Cason and Robertas Zubrickas we test the theory in the lab and…it works! Kickstarter hadn’t yet been created when I first wrote but the DAC mechanism can now be easily explained as a Kickstarter contract with refund bonuses. On Kickstarter and other crowdfunding sites you contribute to a project and if a contribution threshold isn’t reached you get your money back. The Kickstarter contract is useful but it’s still easy for a good project to fail because there are many equilibria with non-funding. For example, if I think that you won’t contribute then I may decide not to contribute and if I don’t contribute then you may decide not to contribute.
It also answers some questions, like ‘who might pay for the bonuses’?
Third, refund bonuses pay for themselves! In theory, refund bonuses are never paid but in practice, as we have seen, some socially valuable projects fail even with refund bonuses. Nevertheless, for reasonable markups it’s still in an entrepreneur’s interest to use refund bonuses because the greater success rate more than pays for having to pay modest refund bonuses when a project fails.
We think refund bonuses can substantially improve crowdfunding and we hope to partner with a crowdfunding site to run a field experiment. Contact me if interested!
Moreover, we find that even taking into account campaign failures, refund bonuses can be financially self-sustainable suggesting the real world value of extending assurance contracts with refund bonuses.
What’s do you think is wrong? I don’t see any contradictions here.
Are you confused about who I’m saying is getting dutch booked? I’m saying pledgers dutchbook themselves, the project will be more than fine, it would be extremely good for the project. It seems like a very good mechanism from the project’s perspective, and I approve of it.
I see how that can be misleading. I’ll try to clarify it. The reason it ended up looking like that was that “kickstarter with refund bonuses added” is, as he acknowledges, a really good way of describing it, even though it was not a product of taking kickstarter and adding refund bonuses.
Alex Tabarrok proposed improving crowdfunding mechanisms with Refund Bonuses. I think this might be a natural occurrence of a dutch book against Causal Decision Theory
I also removed these sections which I kind of left in by accident and had already decided at the time of posting that I couldn’t really stand behind. Sorry about those. Could be true, but I think I was probably understating the value of the credible signal that is sent by having refund bonuses, even for a LDT agent.
As a Logical Decision Theory (LDT) sort of decisionmaker, wow, I think that might all be predicated on a level of cynicism that I have difficulty relating to. When I’m considering a crowdfunding project, I’ll generally infer the existence of a group of faithful, likeminded actors whose decisions are entangled with mine, who would be happy to investigate and promote the project while it is small, knowing that many others will tacitly move along in train with them, and if that group was big enough that the project might succeed, we would go ahead and investigate and promote the project, and that would usually be enough, I think.
Causal Decision Theorists (CDT) floating around, who can’t coordinate like that, or — more charitably — maybe there are people who just can’t accurately infer the size of their good faith entangled cohort very well, and they underestimate it, so they can’t justify adhering. And maybe we need them on board. For them, Refund Bonuses excites me.
This article is wrong—starting with the title.
It also answers some questions, like ‘who might pay for the bonuses’?
The paper has more to say about that:
What’s do you think is wrong? I don’t see any contradictions here.
Are you confused about who I’m saying is getting dutch booked? I’m saying pledgers dutchbook themselves, the project will be more than fine, it would be extremely good for the project. It seems like a very good mechanism from the project’s perspective, and I approve of it.
“Alex Tabarrok proposed improving crowdfunding mechanisms with Refund Bonuses.”
The proposal predates kickstarter.
I see how that can be misleading. I’ll try to clarify it. The reason it ended up looking like that was that “kickstarter with refund bonuses added” is, as he acknowledges, a really good way of describing it, even though it was not a product of taking kickstarter and adding refund bonuses.
For posterity, the original title was
I also removed these sections which I kind of left in by accident and had already decided at the time of posting that I couldn’t really stand behind. Sorry about those.
Could be true, but I think I was probably understating the value of the credible signal that is sent by having refund bonuses, even for a LDT agent.