Contracts with (Social) Benefits: The Implementation of Impact Investing
87 Pages Posted: 26 Apr 2018 Last revised: 9 Dec 2019
Date Written: July 1, 2019
We draw on new data and theory to examine how private equity contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom 1991), few impact funds tie compensation to impact, and most retain traditional financial incentives. Funds contract on impact in other ways, using a combination of flexible and rigid terms consistent with Hart and Moore (2008). They also prioritize the formal oversight that fuels the braiding dynamic of Gilson, Sabel and Scott (2010). In the cross-section of impact funds, those with higher profit goals contract more tightly around both goals. We propose an explanatory framework where this results from hidden differences between agents’ utilities from impact.
Keywords: impact investing, venture capital, private equity, socially responsible investment, sustainable investing, corporate social responsibility, contracts
JEL Classification: D64, D86, G24, G32, K12, M14
Suggested Citation: Suggested Citation