Explaining impact purchases

By Ben Kuhn @ 2015-04-16T00:53 (+10)

This post originally appeared on benkuhn.net. Some readers remarked that it helped them understand impact purchases better, so I'm cross-posting it here.

I'm excited to report that 50% of the impact of my donation matching literature review has just been purchased in the first round of Paul Christiano and Katja Grace's impact purchase!

This means that Paul and Katja now own 50% of the altruistic consequences of the post, so you should consider it only 50% as much of a good deed as you previously did.

Huh?

Paul and Katja are purchasing "certificates of impact," which are a philanthropic instrument they invented. It's like funding someone to do something, except that instead of giving them money before they do the thing, you give them money afterwards.

Why is that better?

It helps to make an analogy to normal tradeable goods.

Suppose I'm buying a shirt. What I generally do is look at all the shirts that are available and then buy one. (Contrast this with the funding model that's normal for philanthropy, where I would pay someone money for a shirt, and then they would make it.)

The normal market model puts most of the downside risk of shirt production on the seller. If my tailor runs out of cloth and can't make my shirt after all, then my tailor doesn't get to sell it so my tailor loses the money. This aligns incentives better: my tailor is likely to try harder to make a saleable shirt if they haven't gotten paid for the result yet. (For instance, Kickstarter products might experience fewer production delays and failures if sellers were only paid when their product shipped.)

An even more important aspect of the normal market model is that it makes it much easier to decide what shirt you want. This isn't such a huge deal for shirts, where it's not so hard to predict ex ante how good the future shirt will be. It's much harder to do that in philanthropic funding!

There's a much more in-depth explanation of why an impact purchase market would be helpful on the website.

How did the process work?

I applied through the form on Paul and Katja's website, giving a short description of the blog post, why I thought it had good consequences, and the minimum amount of money for which I would undo the post's impact.

Then Paul and Katja made their own evaluation of how much each applicant project did, and ran a complicated yet nifty auction process that ensured they would purchase the maximum amount of impact possible while ensuring that I was incentivized to report the true minimum price at which I would be willing to sell the post's impact.

(The structure of the auction is such that my stated price for the post has no effect on what price Katja and Paul buy it at, only on whether or not it gets purchased. It's pretty cool.)

Isn't this basically Paul and Katja throwing money at you for no reason? Why would you name a minimum price greater than zero?

It's not free money for me, because I've now been better incentivized to do things that Paul and Katja think are good for the world.

Well, actually, right now, since Paul and Katja are the only buyers of impact purchases and the market is very thin, I think there's some free money to be had. For instance, if Paul and Katja discontinue the program at the end of the year and nobody else steps up, then the incentives will go away, and nobody will really care that much that once they bought 50% of one of my posts.

Also, because there are so few entrants right now, impact is getting sold at a substantial markup--according to Paul and Katja's impact evaluations, the price at which they purchased impact from sellers this round was almost double what they could have gotten from donating to GiveWell top charities. But I don't expect that to continue.

In the long term, though, impact purchases don't involve any money-throwing at all.

It's easy to think they would, because at first it seems like Paul and Katja aren't really buying anything. The right to claim 50% of my post's impact doesn't seem worth that much because people might not play along. For instance, people might still give me close to 100% of the social status benefits from doing something altruistic.

But actually, the more important thing Paul and Katja are buying is an incentive for me to do more stuff they'd want to buy in the future. On this view, the point of giving them a claim to the post is to make sure that I can't sell more than 100% of it. (If I could do that, it would distort the market instead and lead to people getting too much incentive to do things.) The public notice that they own half of the consequences is simply a mechanism of enforcing this.

So in the long term--if the impact purchase market grows--there's a very good reason for me to name a nonzero minimum price for my post, which is that I might think I could sell it later, or to someone else, for more money.

How was the experience? Would you do it again?

Yes! I think the impact purchase program is really cool, and could fill an important gap in what EA projects get funded/properly incentivized to get done. The application was very quick. (And on top of that, I got paid.)

There's one round of purchases each month, and the next deadline is in a bit over a week on April 25. You should check it out and apply!