Social escrow

By R Ford Denison, published at 10 May 2007 - 8:12pm, last updated 11 years 5 weeks ago.

Many worthwhile projects become possible only when the number of people willing to participate (or the total amount of work they are willing to do, or the total amount of money they are willing to donate) crosses some threshold. For example, a third party might attract more support by refraining from running candidates that would take votes away from "the lesser of two evils"... UNTIL they have enough votes to actually win.

One innovative solution for these threshold problems has been pioneered by a web site called Pledge Bank, discussed previously. People promise to do something, contingent on X other people making the same pledge.

A great idea, but it may not be achieving its full potential, for two reasons:

1) The threshold number for most of their pledges seems rather arbitrary. For example, will 6 letters to George Bush asking him to "save the planet" or 22 people using Open Office have much greater impact than 3 letters or 11 people (i.e., none at all)? The site actually seems to encourage setting low thresholds. This may increase the percentage of successful pledges, while decreasing the percentage of successful projects. I don't have an easy solution to this problem, other than encouraging people to think seriously about thresholds.

2) It's easy to pledge, but there's no mechanism to ensure that people actually fulfill their commitments. It's tempting, for example, to sign on to the "won't pay my taxes" pledge to give tax cheats the confidence to openly refuse to pay taxes so they can be sent to jail where they belong.

Even when everyone pledging agrees with the cause, it may be tempting to renege, especially when the total number of pledges is large. Surely my $50 isn't going to make or break the Draft Gore campaign. But everyone else is thinking the same way, a classic tragedy of the commons.

Pledge Bank claims that 75% of people do follow through on financial pledges, but there’s no enforcement mechanism. I bet most would honor a $10 pledge, but many might have second thoughts about a $50 pledge or a $500 pledge, depending on income. This would be especially true if someone could plausibly say either "they'll have enough money without my contribution" or "even if I honor my pledge, enough others won't that the project won't get completed."

A wide range of problems similar to this might be solved by what I call "social escrow", by analogy with escrow agencies that help with real-estate transactions.

A social escrow agency would accept contributions from a large number of people, keeping those contributions in trust until certain conditions are met. For example, the agency could accept checks designated for a particular purpose requiring a specified amount of money. The agency would keep the checks until the financial goal was reached (e.g., $500,000 for a new transmitter), then turn the checks over to the designated organization (e.g., a public radio station). If the goal isn’t reached by a specified date, the checks would be destroyed, leaving the money in the potential donors accounts. I suggest that this “money-back-unless-success" guarantee would make people more willing to donate.

A business called Fundable is offering to handle such transactions for a 7% fee. Maybe, if the idea catches on, competition among social escrow agencies will drive down fees (possibly to zero, if pledged money can be put in an interest-earning account) and spur innovation. For example, additional conditions could be imposed on the recipient -- Fundable just hands over the money to the group leader -- such as a public radio station reducing the amount of on-air fund-raising.

Alex Tabarrok has proposed something called a "dominant assurance contract" whereby people making pledges would receive a bonus if the pledge drive fails. In effect, people pledging would bet on failure of the pledge drive. But because this would be such a tempting bet (either you get a stronger radio signal or free money), lots of people would pledge, the drive would succeed, and the social escrow company wouldn't have to pay the bonuses.

But what about nonfinancial pledges?