If you, as a private citizen, want to build a bridge across the river to shorten your commute, you run into a few problems. The incredible cost of the proposed bridge puts it beyond your limited resources, so you try and convince thousands of your neighbors to chip in donations. But you don’t want to contribute money unless you reach the total amount necessary to build the bridge; a half-built bridge is worse than no bridge at all.

One answer to this problem is to use the State to coerce contributions (taxes) from the community, but that comes with ethical problems and inefficiencies from bureaucracy and regulatory capture. Recently, new internet-based alternatives like Kickstarter have fueled the rise of private sector crowdfunding (properly known as assurance contracts), solving the fundraising problem by guaranteeing that contributors will only be debited if total contributions reach the required amount.

However, there is still a free rider problem given that people who want the bridge will be unwilling to contribute since there’s a chance that the bridge will be built regardless of whether they, personally, contribute. They can have a bridge without paying, thus the temptation to free ride. To mitigate that problem, Alex coined the idea of the dominant assurance contract, which gives potential free riders an additional incentive to contribute. And dominant assurance contracts could be combined with smart contracts on the blockchain to remove the need for as much trust in the good intentions of strangers.

What is a dominant assurance contract? What is a public good? How much of each public good do we want? How are assurance contracts just like crowdfunding? What is Kickstarter?

Further Reading:

Making Markets Work Better: Dominant Assurance Contracts and Some Other Helpful Ideas, written by Alex Tabarrok

Kickstarter and the NEA, written by Tyler Cowen

The private provision of public goods via dominant assurance contracts, written by Alex Tabarrok

Related Content:

What Theory Won’t Tell You About Public Goods, written by Jon Murphy

Prices Are Too Damn High, Building Tomorrow Podcast

Modern Liberalism and the Paternalism of Things, written by Jason Kuznicki

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