[ Question ]

Why aren't assurance contracts widely used?

by Daniel Kokotajlo 1 min read1st Dec 201914 comments

33


A priori, dominant assurance contracts seem like awesome tools for solving a fairly broad range of collective action problems. Why aren't they used much? Or is it just that they are a new idea and we should expect them to grow in prominence in the next few decades?



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6 Answers

It's certainly a new idea.

I think the reasons it might not work would also vary across potential problems they are trying to solve. What are the incentives that have led to the current state? Do people *actually* want to solve the problem?

You could well ask why they weren't used more in the past, but today they are becoming more widely used. Kickstarter is pretty popular, and they do assurance contracts. In my neighborhood, donations for a synagogue are being gathered on an assurance contract.

A couple thoughts:

  • The assurance contract's strength is also it's greatest weakness. Because its only valuable based on a majority of other people's actions, the most likely outcome is that you spent time (and possibly, the opportunity cost of escrowed money) on something that doesn't work out. The more contracts there are competing for time and money, the more significant this problem.

  • The second biggest issue with dominance assurance contracts is people needing to know about the contract, and spend time understanding it. This means there's a significant marketing cost to successful dominant assurance contracts. I would wager that if you mapped out spend vs. success on real life dominant assurance contracts like petitions and indiegogo campaigns (and scaled by the amount of money/signatures needed) you'd basically see a linear relationship between spend and success.

I think these two points together make dominant assurance contracts less attractive for many use cases than a naive analysis would suggest.

I'd argue that there are actually very few problems that are solved by these contracts, and not solved by more traditional mechanisms like taxes, clubs/churches, private investors, etc.

Can you name a few?

Perhaps one way of looking at this is:

1) Assurance contracts have been used in the past, just in a non-obvious way. The type of collective actions problems being solved traditionally have been via government or clubs and other, non-collective action/public good type settings by things like escrow type solutions.

2) Until the internet and this form of mass communication/connect emerged the "problem" was not the assurance of commitment to contribute but the problem of cost in coordinating any such effort. The "fixed" costs of just proposing a solution and gathering a bunch of people to take action dominated and most of the big issues were being addressed by existing institutions.

I think the problem (at least relative to assurance contracts, which as other repliers have noted, seem to doing okay with kickstarter and other pledging sites), is a mismatch of incentives.

The primary impetus to propose and fund a new dominant assurance contract lies with the entrepreneur, but given a choice between an assurance contract (where if the pledge fails to reach its total, everyone just gets their money back, and the entrepreneur gets nothing), and a dominance assurance contract (where if the pledge fails to reach its total, everyone gets their money back, plus a share of the entrepreneur's original stake), any entrepreneur is going to prefer the first. So it's hard to move the system from assurance contracts to dominant ones.

This might change if there's evidence that the monetary payout encourages people to fully fund more dominance assurance contracts, but that would probably rely on a non-negligible additional pay-out -- and once again, individual entrepreneurs don't have an incentive to provide big payouts just to prove out the dominant assurance theory.