Dominant assurance contracts

Dominant assurance contracts are a refined version of assurance contracts aimed at solving the public good problem. The core issue with public goods is the free-rider problem, where individuals benefit from the good without contributing to its cost, leading to under-provision. Dominant assurance contracts address this by adding a refund bonus mechanism to ensure contributions.

In a typical assurance contract, individuals agree to fund a project, and their money is only collected if enough contributions are made to meet the funding threshold. If the threshold isn’t met, contributors get their money back. Dominant assurance contracts enhance this by giving contributors a bonus on their refunded money if the funding threshold is not reached, making it a dominant strategy to contribute. This incentivizes contributions, doubling the success rate of projects in experimental settings compared to traditional assurance markets 1 2.

Dwarkesh Patel discussed this concept with Alex Tabarrok on "The Lunar Society" podcast episode titled Alex Tabarrok - Prizes, Prices, and Public Goods. They elaborated on the effectiveness of dominant assurance contracts in practical applications, such as increasing the number of successful projects and potentially being used on platforms like Kickstarter 3.