Dominant Assurance Contracts
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INVENTED BY ALEX TABBARROK
A Dominant Assurance Contract is a variant of an assurance contract with additional incentives. People pledge money with the promise that if the project doesn’t get enough funds to proceed, they will get their money back, plus a bonus. This bonus comes from the project organizer and serves as an extra incentive to encourage people to contribute, making it a smart choice to pledge money regardless of what others do.
Assurance Contracts and Dominant Assurance Contracts should be used by project organizers and fundraisers who are seeking to overcome the free-rider problem and ensure sufficient participation in funding public goods or collective projects. They are particularly useful for crowdfunding campaigns, community initiatives, and other collective endeavors where reaching a funding threshold is critical for project viability. By offering a financial incentive to contributors if the funding goal isn’t met, organizers can significantly increase the likelihood of achieving the required funding.
Assurance Contracts are often used in fundraising campaigns for public radio and television. Stations pledge to provide programming if they reach a certain funding threshold.
Kickstarter operates similarly
to an assurance contract. On
Kickstarter, project creators set a funding goal and a deadline. People pledge money to support the project, but their contributions are only collected if the total pledges meet or exceed the funding goal by the deadline. If the goal is not met, no money is collected, and backers are not charged.
In 1999, the Save the Redwoods League used an assurance contract to secure the purchase of the Headwaters Forest in California. The campaign required raising a significant amount of money from donors, which was only collected once the target amount was reached.
A project proposer outlines a public good or project and sets a funding goal.
Individuals pledge contributions towards the project, contingent on the total pledges meeting the funding goal.
An assurance premium is promised to contributors if the funding goal is not met, incentivizing participation.
If the total pledges meet or exceed the funding goal, the funds are collected and given to the project proposer.
If the funding goal is not reached, the pledged funds are returned to the contributors along with the assurance premium.
In a Dominant Assurance Contract, the project proposer(s) are eligible to receive funding from the pool if the contract’s conditions, such as reaching a sufficient number of pledged contributions, are met. If these conditions are not met, the contributors are refunded their money, and they may also receive an assurance premium as an incentive for their initial pledge.
In a Dominant Assurance Contract, the eligibility to allocate typically lies with the contributors who pledge funds to the project. These contributors decide whether to pledge their money, effectively allocating funds toward the project if the funding goal is reached. If enough pledges are made to meet the contract’s conditions, the project receives the funding; otherwise, the funds are refunded to the contributors, along with any assurance premium.
In dominant assurance contracts, payouts are calculated based on whether the funding goal is met. If the required amount of contributions is pledged, the project proposer receives the pledged funds to carry out the project. If the goal is not met, the pledged funds are returned to the contributors, often with an additional assurance premium paid to them as an incentive for their participation. The premium compensates contributors for the risk they took in pledging to a potentially unfunded project.
In dominant assurance contracts, the pool is distributed based on the project’s funding outcome. If the funding goal is met, the entire pool of pledged contributions is given to the project proposer to carry out the project. If the funding goal is not met, the pool is returned to the contributors, with each contributor receiving their pledged amount plus an assurance premium. This premium serves as an incentive for their participation, compensating them for the risk they took in pledging to the project.
The funds can be sent as an ETH or ERC20 txn. In Allo, the funds can be distributed it to the accepted projects in one transaction, or via stream protocols like Superfluid or drips.
A Dominant Assurance Contract is a mechanism in game theory designed to overcome the free-rider problem often encountered in the provision of public goods. In a traditional assurance contract, individuals pledge to contribute to a project only if enough others do the same, ensuring that the project will only proceed if it is sufficiently funded. However, this can still lead to suboptimal outcomes if individuals choose to wait for others to contribute first, hoping to free-ride on others’ contributions.
To address this, the Dominant Assurance Contract introduces an additional incentive structure. The organizer promises to compensate contributors if the project fails to reach its funding goal, typically by offering a bonus or refund that exceeds their initial contribution. This turns the decision to contribute into a dominant strategy, meaning that contributing is the best option regardless of what others do. Even if the project does not go ahead, contributors are better off than if they had not contributed, due to the compensation offered.
By aligning individual incentives with the collective goal, dominant assurance contracts ensure higher participation rates.Participants are motivated to contribute because they are guaranteed to benefit either from the successful completion of the project or from the compensation if the project fails. This mechanism effectively solves the coordination problem and leads to the successful provision of public goods that might otherwise be underfunded.