Government Outcomes Lab published in March an article exploring how public service commissioners can improve outcomes in Social Outcomes Contracts  (SOC)*(in the article referred to as Social Impact Bonds)* by applying economic theory of transaction costs. Transaction costs are costs associated with an actor choosing to purchase a good or a service from an external actor as opposed to producing it internally. In a SOC, the risk is shared such that part of compensation for the commissioned service depend on the performance of the service provider, in contrast to a traditional contract where the commissioner solely shoulders the risk. The contractual arrangement calls for robust performance management and careful evaluation to ensure that each part of the contract fulfill their commitment. Additionally, the arrangement requires a tight, specified contract that clearly defines the outcome measure that the financial return is based on. With regards to this, the transactions costs of a SOC are never zero. However, commissioners have the potential of forming contracts that balances the transaction costs while ensuring quality and outcomes that implies sustainable and long-term societal gains.

GO-lab emphasizes that there is a potential trade-off between transaction costs and achieving the desired social outcomes associated with the contract. In order to ensure a contract that balances the transaction costs and best possible outcomes, three concrete objectives are proposed:

  1. A tightly defined eligible cohort to avoid too broad or biased interpretations and to ensure that those most in need of the intervention receives it. This criteria has two sub-tagets:
    • The eligible cohort is objectively defined to avoid cherry picking of “easy-to-help” individuals
    • There is minimal or well understood variation in difficulty-to-help to make sure the intervention only concentrate on easy-to-help participants
  2. The payable outcomes are valid and are aligned to the policy objective as defined by the commissioner. The specified outcomes need to meaningfully distinguish successful programmes from failed ones. The authors suggest three interrelated criteria to achieve such an outcome:
    • There is evidence of the validity of the programme’s cause-and-effect chain: a logic model or a theory-of-change
    • Payable social outcome will be sustained without continued intervention support
    • The tracking period is long enough to capture an appropriate temporal blend of outcomes
  3. The outcome prices must balance the attribution of outcomes to the intervention, the social benefits of the participants, the direct cashable savings for the commissioner, and the wider public benefit.

By building best-practice and institutional capacity to develop models to test new interventions that ensure quality in the evaluation of outcomes on new target areas, SHIC has the potential of decreasing transaction costs for Social Outcomes Contract and contribute to an efficient and sustainable use of resources.

Read more about the GO-lab here:

The article is available here: