This MedLibrary.org supplementary page on Assurance contract is provided directly from the open source Wikipedia as a service to our readers. Please see the note below on authorship of this content, as well as the Wikipedia usage guidelines. To search for other content from our encyclopedia supplement, please use the form below:
Related Sponsors
Assurance contracts, also known as provision point mechanisms are a financial technology that facilitates the voluntary creation of public goods and Club goods in the face of the free rider problem.
The free rider problem is that there may be actions that would benefit a large group of people, but once the action is taken, there is no way to exclude those who did not pay for the action from the benefits. This leads to a game theoretic problem: all members of a group might be better off if an action was taken, and the members of the group contributed to the cost of the action, but many members of the group may make the perfectly rational decision to let others pay for it, then reap the benefits for free, possibly with the result that no action is taken. The result of this rational game play is lower utility for everyone.
Assurance contracts operate as follows:
In a binding way, members of a group pledge to contribute to action A if a total contribution level is reached (often a monetary threshold, or a quorum of N members making the same pledge). If the threshold level is met (perhaps by a certain expiration date), the action is taken, and the public good is provided; otherwise, the parties are not bound to carry through the action.
The binding mechanism may be a contract enforced by a government, a contract enforced by a private organization (e.g. a mediator, a protection agency in an anarcho-capitalist society, etc.), an escrow organization (in such cases, the "binding contract" is "signed" by depositing funds in advance, which are later either disbursed according to the contract, or refunded), etc.
Contents |
Political overtones
Assurance contracts are popular with libertarians and anarcho-capitalists as they solve a problem that has usually required governments, and do so in a way that does not involve coercion.
Variants
Dominant Assurance Contracts, created by Alex Tabarrok, involve an extra component - an entrepreneur creates extra value for signors by paying them if and only if a quorum is not formed; if the quorum is not formed, the signors do not pay their share, and indeed, actually benefit from having participated since they keep the monies the entrepreneur paid them. Similarly, if the quorum succeeds, they return the entrepreneur's monies, and pay a little extra to the entrepreneur for taking the risk of the quorum failing and his money not being returned. So, a player will calculate that whether the quorum fails or not he benefits- if it fails, then he reaps a monetary return, and if it succeeds, he pays only a small amount more under a Dominant Assurance Contract than under an Assurance Contract, plus the public good will be produced. Tabarrok asserts that this creates a dominant strategy of participation for all players. Because all players will calculate that it is in their best interests to participate, the contract will succeed, and the entrepreneur will be rewarded. In a meta-game, this reward is an incentive for other entrepreneurs to enter the Dominant Assurance Contract market, driving down the cost disadvantage of Dominant Assurance Contracts versus Assurance Contracts.
See also
External links
- A popular introduction to the theory of assurance contracts (as measured by Google page- blogosphere-ranking), was this post in the Marginal Revolution blog.
- Tabarrok's paper on Dominant Assurance Contracts (PDF).
- Participation in the Free State Project is based on an assurance contract. Participants agree to relocate to New Hampshire upon getting pledges from 20,000 other people (by a certain date) to do the same. If not enough people pledge, pledgers are absolved from the requirement to relocate.
Assurance Contract Websites
- ThePoint.com allows users to create assurance contracts.
- Fundable.org provides an assurance contracts mechanism.
- Pledgebank.com is another attempt to set up assurance contracts.
- Public Software Fund is another effort at assurance contracts for software improvements.
- The Digital Art Auction is an early attempt to set up assurance contracts, now superseded by a contingency market called The Contingency Market - which also supports dominant assurance contracts.
Wikipedia content modification information:
- This page was last modified on 12 July 2008, at 17:49.
Wikipedia Authorship and Review
Wikipedia content provided here is not reviewed directly by MedLibrary.org. Wikipedia content is authored by an open community of volunteers and is not produced by or in any way affiliated with MedLibrary.org.
Wikipedia Usage Guidelines
This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article on "Assurance contract".
The URL for this specific entry is:
All Wikipedia text is available under the terms of the GNU Free Documentation License. (See Copyrights for details). Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc.