0 karmaJoined Oct 2018


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. 

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.