Shaun William Davies

Incentivizing Impact Investing

We consider a project which produces both a public social good and a private good — an impact investment. When the project is financed with external capital, the owner may have an incentive to under or over invest in social good. Under investment arises when the owner does not fully internalize the social value of the public good. Over investment arises because repayment uses up only the private good, making the social good relatively more attractive. The model provides a theoretical foundation for funding impact investments through Social Impact Bonds — to discourage over investment — or Social Impact Guarantees — to discourage under investment. When social investors have sufficient capital, socially responsible investment strategies such as equity investments in socially responsible firms are also optimal. We would like to thank Maitreesh Ghatak, Archishman Chakraborty, Ivo Welch, Ed Van Wesep, Rob Dam, Kyle Matoba, and seminar participants at CU-Boulder Leeds School of Business, UCLA Anderson School of Management, the HKUST Conference on the Impact of Responsible and Sustainable Investing, the Emerging Markets Finance Conference, and the Geneva Summit on Sustainable Finance for their helpful insights and suggestions. Anderson School of Management, University of California, Los Angeles, 110 Westwood Plaza Suite C-411, Los Angeles, CA 90095, bhagwan@anderson.ucla.edu. Leeds School of Business, University of Colorado, Boulder, Campus Box 419, Boulder, CO 80309, shaun.davies@colorado.edu. Leeds School of Business, University of Colorado, Boulder, Campus Box 419, Boulder, CO 80309, brian.waters@colorado.edu.We study joint financing between profit-motivated and socially motivated (impact) investors and derive conditions under which impact investments improve social outcomes. When project owners cannot commit to social objectives, impact investors hold financial claims to counterbalance owners’ tendencies to overemphasize profits. Impact investors’ ownership stakes are higher when the value of social output is higher, and pure nonprofit status may be optimal for the highest valued social projects. We provide guidance about the design of contingent social contracts, such as social impact bonds and social impact guarantees.Received May 23, 2016; editorial decision April 28, 2018 by Editor Francesca Cornelli. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Competition and Transparency in Financial Markets

Is competition sufficient to induce transparency in financial markets? We examine this question taking into consideration that competition in financial markets frequently resembles a tournament, where superior relative performance and greater visibility are rewarded with convex payoffs. We show under fairly general conditions (i.e., model variations) that higher competition for this remuneration often makes discretionary disclosure less likely. In the limit when the market is perfectly competitive, transparency is minimized. We show that this effect may decrease efficiency and per capita welfare, particularly when it is optimal to screen all market participants to determine whether they should be allocated a scarce good. Our analysis implies, then, that competition might be unreliable as a driver of transparency and efficiency in financial markets, especially in settings where tournament-style remuneration takes place.

The Implementation of State Sponsored Retirement Plans

State sponsored retirement plans have been proposed and implemented to provide people with new access to defined contribution retirement opportunities. Many of these people have no other options and typically have low income and are less educated. We study optimal plan implementation in a theoretical model and analyze how the right menu of portfolio options and default option should be chosen based on the financial sophistication of the participants, their behavioral biases, the prevalent political philosophy, and the political economy. The paper provides several novel positive and normative implications, which appear to be empirically plausible.