Theoretical possibilitiesAlex Tabarrok, economist and Marginal Revolution University co-founder, published a paper two decades ago that put forward a solution to the free rider problem in market provision of public goods – a problem because public goods are non-excludable (you can’t stop people who haven’t paid from using them) and non-rivalrous (one person’s use doesn’t impinge on someone else’s). Social care, scientific research and schooling are not public goods – you can exclude people, and if one person is taking a school place or a carer’s time, someone else can’t. But Tabarrok’s solution – the dominant assurance contract – solves another issue at the same time: the forced rider.
A forced rider is someone who has to pay for a service even if they don’t benefit from that service. Perhaps people endure being forced riders because we all think things like schools or social care should be provided, and there’s no way of providing them, save the state. So even if the process is inefficient and often seemingly unfair, we put up with it. The dominant assurance contract is an example of an alternative way. In a traditional assurance contract, people pledge to fund a public good, provided enough other people pledge to fund it too. No money is taken unless enough backers come in and fund. This is already the norm on donation and rewards-based crowdfunding platforms like Kickstarter. A dominant assurance contract adds a layer: the individual or company agreeing to produce the product or public good if a funding target is reached also agrees to do so on the grounds that, if x or fewer people pledge, they will pay out a sum of money (“prize”) to those who did. As Tabarrok says: “pledging is now a no-lose proposition – if enough people pledge you get the public good and if not enough pledge you get the prize.” Harvard researcher Jameson Quinn trialled Tabarrok’s idea in 2013, raising money for The Center for Election Science. Each backer agreed to give $60 if 20 or more pledged. If fewer than 20 did, Quinn would give them $5 each, and they would pay nothing. It worked. The final three pledges only came in the last half an hour, but the prospect of potentially getting $5 for nothing meant that, even for the least interested, there was an incentive to participate in the fundraise.