Incentivizing Impact Investing

Abstract:     

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.

Number of Pages in PDF File: 37

Keywords: Impact Investing, Social Impact Bonds, Social Impact Guarantees, SRI, Sustainable Finance

JEL Classification: M14, O35, D86