I love this idea both as a donor and as an entrepreneur. For smaller projects, transaction costs of funding can dominate and this lowers those costs when the entrepreneur is risk tolerant.
When you say transaction costs, I assume you are referring to more than just money - but it’s confusing to me if this is actually cheaper (monetarily) in the short run assuming that the donors don’t just dole out money based on what felt right (or do output based finance rather than outcome). Like they still need to pay evaluators to decide payouts and potentially they have opened themselves up to more criticism or even legal disputes if they had established clear guidelines. I agree the process as a whole is a lot smoother though
Sorry for the late reply.
How do impact certs reduce transaction costs?
1. project risk has many constituents. one of the main project risks is the risk of funding the wrong person. Donors mitigate against this risk by vetting the entrepreneur. This imposes two costs: the first is the vetting cost, and the second is the opportunity cost of rejecting projects whose entrepreneurs fail the vetting filter. Impact certs shift more project risk from donor to the entrepreneur. Where the entrepreneur is capable of assuming this risk, the two costs are eliminated - both the vetting cost and the vetting-false-negative cost.
2. Shifting risk from donor to entrepreneur also improves the entrepreneur's incentives. So funders don't need to hedge against the cynical entrepreneur risk (by vetting and rejecting possibly good projects).
3. it is easier to explain why a project had impact in practice (in case it did) than to convince someone else that a project is reasonably expected to have an impact. Lower effort on convincing the donor is again a reduced transaction cost.
Yes, you still need impact assessment, but impact assessment after the fact is easier than a-priori expected impact assessment.
This concept is similar to the idea of social impact bonds (SIB) / pay-for-success (PFS) contracts / flexible prizes to incentivise impact investors to fund the development of public goods in return for the outcome payments if successful. Crowd Funded Cures is working on implementing this idea to incentivise funding of clinical trials for "unmonopolisable therapies" where patents do not work because you cannot recover your investment by charging a monopoly price e.g. finding new uses for off-patent drugs, supplements, plant medicines & psychedelics, diets and non-drug / lifestyle interventions - see https://crowdfundedcures.medium.com/pay-for-success-contracts-a-new-model-to-develop-new-therapies-from-old-drugs-f69b2189184d
This creates a scalable business model on the basis that the cost savings will exceed the amount of outcome payments. For example, a SIB for homelessness, a local govt pays $10k per homeless person housed for at least a year, which saves the local govt $100k in reduced policing costs and economic harm. In the same way a $50m SIB for obtaining FDA approval for repurposing off-patent fluvoxamine to treat Covid could save governments $1b+ from reduced reliance on patented drugs such as molnupiravir - see https://golab.bsg.ox.ac.uk/community/blogs/innovative-financing-mechanisms-2/
This entry should mention that this is also known as an impact purchase, or that there's a very related idea by that name. But I'm not sure which of those statements is more accurate and I'm busy/lazy, so have at it, other editors!