Rewarding Poverty Alleviation: A Case Study in Payment-by-Results

Payment-by-Results (PbR) involves funders’ commitments to make future grant payments as a function of yet-unachieved results. Though the justification may go beyond the desire to overcome incentive problems (such as moral hazard or adverse selection), it is desirable for payments to be closely tied to impacts – “as if” to incentivize implementers to perform in the interests of program beneficiaries. We describe a so-called impact bond transaction in the poverty alleviation space that commits payments in direct proportion to the economic value created in beneficiary households. Even so, incentive-compatibility is not easily achieved in practice: when funders insure themselves against extreme outcomes, and when working capital providers absorb performance risk, they alter the shape of the reward function. The greater the error associated with impact measurement, the more incentives can be affected.