Social-impact bonds (SIBs), or pay for success financing, are innovative financial arrangements
that could provide a cutting-edge way to fund experimentation and expanded opportunities in
SIBs are entirely contingent on the performance of the service provider and promise returns to
private investors only if performance objectives are met. They were first pioneered in England
in 2010. Today they are being used to achieve goals such as decreasing homelessness in
England and reducing recidivism at Rikers Island prison in New York. There is growing
interest in SIBs: According to The Economist, when Harvard University professor Jeffrey
Liebman, who assisted in the set-up of several American SIBs, invited other states and local
governments to apply for his help setting up their own, he received 28 applications.
Social-impact bonds have many designs, but have at least three fundamental, common
• A definable, verifiable outcome to be achieved by the social service provider, the
recipient of the funds;
• An initiating party, such as a government agency, that issues the bonds and is
responsible for making payments to the organization and investors; and
• Authority and discretion is granted to the service provider in how it goes about achieving
the desired goal.
So how might this unique funding model benefit education? Consider the hypothetical case of an
independent, education-focused organization—perhaps a foundation—that wants to help launch
more “early college” high schools in a state. That organization would work with a bond-issuing
entity, like state government, to develop a social-impact bond. Meanwhile,...