I don't think this actually solves the freerider problem. It solves the coordination problem.

In your toy example Bob was able to specify that he wouldn't build anything unless everyone signed the contract - if this is possible you don't really need the dominant assurance part, as it's still worth it for the freerider to sign up, so long as they assume there's a decent chance others will as well (and if they don't, that's going to discourage non-freeriders as well).

In real life though, this is impossible. Instead the contract is along the lines of "I will do this so long as at least X people sign up, or we get Y dollars of funding".

In that case it's only worth it for the freerider to sign up if either.

1. They estimate with high probability the limit will only be reached iff they sign up (but this is the case even with a standard Kickstarter, dominant assurance isn't necessary).

Or

2. They estimate with high probability that the limit won't be reached (in which case they're on average just milking the contract for free cash)

There's still no incentive for the freerider to sign up if the limit would otherwise be reached.

Instead what this solves is the coordination problem. Prosocial people want to fund various markets, but it's a waste of time doing this if nobody else joins in. The dominant assurance contract makes this worth it either way, so it's easier for markets to get off the ground to the point where it looks like they'll probably make it.

After reading the comments and re-reading the article, I think it's a little confused. The central conclusion, that this crowdfunding model is more effective and would help us fund more things we want, is correct (as I also argued in my own post [LW · GW]). But I think some of the reasoning and examples are wrong. I'll try to explain.

Free riding is the wrong framing in most cases

In your road example, you changed the condition from a funding goal ($90), to a backer-amount goal, in order to force everyone to pay if they want to have a road. I think this is both undesirable and irrelevant in most cases:

• Irrelevant: Except in small and well defined communities, most crowdfunding campaigns target a large population that's hard to quantify and single out. And most campaigns don't need everyone who would benefit to back them, only enough of them. If you tried to do a campaign where everyone who would benefit from the it has to back it for it to succeed, it would definitely fail.
• Undesirable: The fact that a good is public doesn't mean that everyone benefits from it the same amount, because not everyone values it the same amount. In your example, the villagers probably value the road differently (perhaps based on how much they drive). It makes sense that people will pay differently based on how much they value the good. If we fund a Brandon Sanderson adaptation, it makes sense that the hardcore fans will pay a lot for it and I would pay little, because I want it, but not as much as they do.

Which is why crowdfunding campaigns use an amount of money as the goal instead of the amount of backers. But if you use funding-goal instead of a backers-goal, and people collectively value what you offer more than what you ask for it, then you still have the possibility of free riding, because it would be possible for the campaign to succeed without everybody (I think this is fine).

The goal isn't to eliminate free-riding, it's to prevent projects from failing because people try to free ride, and these are very different things, because the latter means you're willing to tolerate free-riders as long as the project gets funded, and former means you're unwilling to tolerate free-riding even if the project could otherwise be funded.

So, though DACs do reduce free-riding, and do probably allow people to donate less each and still reach the goal, they don't completely solve free riding because you'd rarely want to use them in such a way where they do (which is why you implement refund compensation but don't require certain amount of participation or set the price so high that everyone would need to participate).

As @Yair Halberstadt [LW · GW] said [LW(p) · GW(p)], the problem this actually solve is the coordination problem faced by people who want to back the project if it succeeds, but don't want to pay the cost of backing a failed project. In that sense, refund compensation is a very natural extension of of the Kickstarter model, because it simply recognizes that people need to be refunded for their effort and not just their money.  

About your element/matrix example [LW · GW], the problem is indeed free-riding, but DACs would only solve the problem if he wouldn't keep developing it unless he got a certain amount of funding (which would make it a coordination problem). If he doesn't want to condition the development on a certain level of funding, then funding will be based only on the goodwill of people. So DACs also don't solve cases where a reward is deserved, but you're gonna do the thing regardless.

And because of the title, would a DAC be a good way to raise money for asteroid deflection? Definitely not as a way to try to make everyone participate in funding the deflection. It's a good solution only if there's a minimum amount of funding or backers you can do it with, and with any less than that you may as well not bother. But that doesn't seem like a good idea. If you get $5 or 1 person less than you asked for ate you just gonna do nothing? Or would you rather try anyway and die with dignity [LW · GW]? 

Public/private goods

I think the focus on public goods in the post is a bit confusing. Not because it's a problem to have and offer that as the main motivation for this, but because it makes it seem like it's only relevant for public goods, where it's still as relevant for private goods if there's a big upfront cost to producing any at all, so you have to have a minimum number of customers. For example, designing a product is a large cost that you have to pay upfront, but it also doesn't scale with the amount of products sold. So it makes sense to say 'I will sell this only if there's enough buyers to cover the design cost'. Most crowdfunding campaigns for private goods are exactly of this type, and would benefit almost as much from refund compensation as public good campaigns (and it should sadded us that they fail due to a coordination problems as well, because even though it's a private good it's still lost value).

Dominant assurance contracts seems gambling-like/scam-like the same way that crypto-currency does. The top comment on the Berkeley House Dinner Project is "this is a dollar-auction (AKA scam)", and the second top comment is "Surely this is illegal?"

I don't see anywhere in your post where you address the question of whether this is actually legal, though? An offer that if someone gives you money then (depending on factors outside of that person's control) you may give them double their money back sounds like the kind of thing societies tend to regulate heavily. For example, in the US, I think it is possible that this would pass the Howey test to be considered a security?

This is a interesting idea, but your example oversells it substantially. Future iterations need to not do this, or you'll sound like a huckster and not get support.

If all ten people on the street have to contribute, everyone knows for sure that they won't get what they want if they don't contribute. No payback is necessary; free riding is impossible. That's the easy case. When you just need some amount of money rather than every single individual to contribute, it's quite possible to free ride.

But why can't I just let other people pay and free-ride? 

You haven't been paying attention. Unless I've priced this contract wrong, if you don't pay it doesn't happen.

This is egregiously wrong. You can't possibly know that this contract will fail if each individual reader of this sentence doesn't contribute. This is the distinction from the example you've used.

So I agree with the other comments that this does not fix the freerider problem. At all. Which is the big problem, not the frictional costs of pledging.

I think you've got to fix that terrible logic in future versions, or you'll sound dishonest.

I still pledged fifty bucks, because improving crowdsourcing like Kickstarter even marginally is a worthy goal! And the frictional cost is still a problem, so overcoming it will help.

Partial Update

I'm fully funded! In fact, as of writing. I have nearly 3x more funding than I asked for! The money really started rolling in after Alex Tabarrok plugged my project on marginal revolution, which I did not expect.

I'm not sure why people continued to give me money after the project was fully funded but I'm very thankful. (Of course, the more money I get the longer I can work on the project increasing the chance of success). The fundraising only officially ends 15 September, so I'm not going to give a full report until then.

I was hoping to do some neglected chores while the campaign ran, but since I'm already fully-funded, I feel I can't leave people hanging. So right now I'm collecting people who would like to use my platform to produce public goods to solicit requirements from them. If you're interested join our Discord if you haven't already.

Wonderful that you’re working on this! I’m with AI Safety Impact Markets, and I suspect that we will need a system like this eventually. We haven’t received a lot of feedback to the effect yet, so I haven’t prioritized it, but there are at least two applications for it (for investors and (one day, speculatively) for impact buyers/retrofunders). We’re currently addressing it with a bonding curve auction of sorts, which incentivizes donors to come in early, so that they’re also not so incentivized to wait each other out. The incentive structures are different, though, so maybe a combination would be nice.

That last link links to an article that links to GiveWell’s donor’s dilemma. Some people outside EA who I’ve talked to were surprised by it. They had found that donors flock to uncontroversially good donation opportunities and don’t try to save their donations for niche projects. I’m thinking that might be because they donate to look good to others, which works better if they actually look good to others and not weird. So maybe DACs are mostly needed for coordination among utilitarians or some range of consequentialists? Then again these are different problems – freeriding because you want the benefits of the public good for free vs. freeriding so that you can use your funds for a niche project. Both defections in assurance games though.

Sorry if I missed it in the article, but who are the parties you would like to get on board to put up the refund bonuses? Can you bootstrap them by using DACs to fundraise for bigger and bigger refund bonuses?

Are you aware of any issues with securities law, since people can make monetary profits off refund bonuses? I might be able to get you in touch with someone who knows these things when it comes to the US. I imagine (no idea really) that the law of the country of the person who starts a fundraiser will be what matters legally.

Can you maybe just pick out a charity fundraising platform that has funding thresholds and refunds (and is used by consequentialists), put Pol.is on top to rank the projects by how uncontroversial they are, and then offer proportional (to the uncontroversiality) refund bonuses to everyone who contributed to failed fundraisers? Maybe they can apply, prove that they’ve contributed to a failed fundraiser, and get the payout? Maybe, if you’re completely independent of the people who put up the fundraisers, you won’t risk getting them in trouble with the SEC?

More philosophically: I think it’s hard to distinguish freeriding from division of labor in economies of scale when there is no explicit coordination. DACs are probably useful in the majority of cases, but there’s a minority of cases where people (usually rather altruistic people) should pick their battles, focus on the stuff where they can make the greatest marginal contribution, and “freeride” on the social change that others effect in other areas. Put differently, I would love a non-speciesist world and a world where funding in AI safety is allocated efficiently. I’m currently working only on the second problem, so one could argue that I’m freeriding on others’ solutions to the first. But in a different sense it’s just a division of labor among people who want to make the world a better place in general. So some seeming freerider problems probably need fixing with DACs, while others might not be problems at all or might be improved with better communication without anyone having to put up a refund bonus. (But money is flexible, so DACs for fundraising are probably robustly useful.)

Awesome effort! Please keep us posted of how it’s going!

Btw., I think it would be useful to mention what the article is about in the title. I would not have read it (even though I’m very interested in the topic) if Dony hadn’t told me that it’s about DACs!

Love the idea (contributed 10 dollars), but I don't love the title - it feels a little clickbaity (I expected an article about asteroid deflection, not about DACs).

I'm somewhat flabbergasted that no one has mentioned radicalxChange or quadratic funding. They're a solution that doesn't force the producer to take on all the risks of failure, at the cost of needing a centralized pot of money.

I think DACs face two challenges.

1. The cost/benefit ratio for the population of potential projects is bimodal. They're either so attractive that they have no trouble seeking donors and executors via normal Kickstarter, or so unattractive that they'll fail to secure funding with or without a DAC.
2. Even if DACs were normal, Bob the Builder exposes himself to financial risk in order to launch one. He has to increase his funding goal in order to compensate, making the value proposition worse.

For these reasons, it's hard for me to get excited about DACs.

There is probably a narrow band of projects where DACs are make-or-break, and because you're excited about them, I think it's great if you get the funding you're hoping for and succeed in normalizing them. Prove me wrong, by all means!

This all works if Frank is a fully rational agent that only pursues a Nash equilibrium. But most people aren't that rational (or pursue different values). Would I want asteroid deflection to depend on a DAC? Hell no, because that implies there's a need for unanimous paying in for the sake of deflecting the asteroid, and I know someone's going to not pay anyway for weird obscure reasons like that they worship the asteroid as a god or something.

I have a bad feeling about this. I think that correctly pricing these contracts will be very hard to do. If a lot of contracts fail and people lose their collateral, then people are going to stop putting up collateral. Also, some people won't care about any particular public good and might make a pledge anyway in the hope of getting a refund bonus and will be upset when they "lose" their money or might even try to sabotage an open contract.

I'm very interested in assurance contract websites (I wrote two of the first LW posts about them, 1 [LW · GW], 2 [LW · GW]) and refund bonuses [LW · GW] - I would go ahead and say that I'm at the top of your target audience in this sense - but I didn't read this post yet because you haven't made it clear in the title or the first paragraph that it's about those things. So I suggest making it clearer and then maybe more people will see it.

Anyway, now that I know it's about these things, you got a strong upvote. Also, just yesterday I created a manifold question on whether, by 2026, a crowdfunding campaign will offer refund bonuses, so uh.. I guess you made it resolve Yes.

I like the idea of getting more people to contribute to such contracts. Not thrilled about the execution. I think there is a massive product problem with the idea -- people don't understand it, think it is a scam, etc. If your efforts were more directed at the problem of getting people to understand and be excited about crowdfunding contracts like this, I would be a lot more excited.

Either I am missing a point somewhere, or this probably doesn't work as well outside of textbook examples.

In the example, Frank was "blackmailed" into paying, because the builder knew that there were exactly 10 villagers, and knew that Frank needs the street paved. In real life, you often do not have this kind of knowledge. If instead the builder was unsure whether 9 or 10 villagers actually need the street paved, I assume he would have set up the rules so that it is enough for 9 villagers to pay, which means that Frank could have free-rided by claiming falsely that he does not need the street.

In other words, this solution gets rid of the potential free-riders by (1) identifying them, and (2) setting up the rules to blackmail them. -- "I know that you also need this done, so if you don't contribute, it won't get done."

If you make a mistake, and incorrectly assume that Frank needs the street, but in fact he does not, your project has failed (and you also need to pay money to everyone who contributed). The same thing happens even if Frank actually needs the street, but he is too paranoid to trust you. Or if Frank is (or wants to become) your competitor, so he will sacrifice the potential benefit of the street, in order to significantly hurt his competitor. Now imagine this scaled to a population with 10000 people, containing 100 Franks. Good luck!

It's my impression that currently many "successful" Kickstarter projects already break their promises (most commonly by delivering very late, sometimes in more dramatic fashions) and rarely suffer any consequences for this.

I have some concerns that if the penalty for missing your funding goal (i.e. losing your collateral) is worse than the penalty for funding but then failing to deliver (i.e. probably just a reputation hit), that's a bad incentive for creators.  Some creators might try to meet their funding goal artificially (e.g. by secretly contributing their own money, or by intentionally setting their goal too low) in order to save their collateral, knowing that they won't be able to deliver, but calculating that the expected penalty for failure will be less than the collateral.

One could perhaps solve that by keeping the collateral in escrow until the project actually delivers, but that will raise transaction costs, and you'd effectively be signing up to arbitrate what counts as a "success".

I think the biggest risk of DACs is that it incentivises people to fund contracts they don't actually want fulfilled to milk the proposer for cash.

My expectation is that if this becomes mature you'll get traders which try to predict which contracts won't be fully funded, and then push them up to say 50% (after which pushing them further risks them actually getting fully funded).

This not only discourages proposers from putting up contracts (to easy to lose money), but also makes it harder for users to easily see which contracts are worth funding and which aren't. There'll be a lot of contracts mostly funded, some because they're actually good and people want them, and some because they're bad and traders are trying to make money.

Interested to hear your thoughts in how to solve this?

Paypal has transaction costs. How much of the refund bonus am I actually going to get?

I think this is important and I'm happy someone is doing this, so I Pledged $25 :)

That said, I think for it to be successful the design needs to be improved a lot (though perhaps this could be provisioned later with another campaign), and the legal side has to be sorted out, and also it needs a better domain name. I'd be glad to help where I can, so I joined the discord.

It seems like the problem this actually solves is the transaction cost of evaluating a project. This doesn't seem like a problem right now. Maybe people would use kickstarter very differently if DACs were commonplace, but as it stands now people chip in very small amounts based mostly on vibes. 

Given the uncertainties on choosing pricing, I'm not sure there's any clear lesson we could draw from an absolute failure rate even in a world where dominant assurance contracts were commonplace. I like the idea of using prediction markets to choose the price, in a world where prediction markets are more mature as well.

Is there a way to do this without needing to secure collateral for the refund, using some stable investment vehicle like a CD? "The earlier you pledge, the bigger refund you get if the contract isn't fully funded" might help avoid the "waiting until the last moment" issue, but maybe there's some perverse incentive or other blocker.

I'm also very curious about how this method could solve issues with funding of scientific research. The lack of market pricing for research is a major impediment to allocating public funds effectively. But what prediction market can accurately estimate the price of something that might not pay off for 100 years?

I don't think the assumption of equal transaction costs holds. If I want to fill in some potholes on my street, I can go door to door and ask for donations - which costs me time but has minimal and well understood costs to the other contributors. If I have to add "explain this new thing" and "keep track of escrow funds" and "cycling back and telling everyone how the project funding is going, and making them re-decide if/how much to contribute" that is a whole bunch of extra costs.

Also, of the public good is not quantum (eg, I could fix anywhere from 1-10 of the potholes, amd do it well or slapdash) then the producer can make a decision about quality after seeing the final funding total, rather than having to specify everything in advance. For example, your website needs, say, 40 hours of work to be a minimally viable product, but could continue to benefit from work up to 400 hours. How many hours is the (suspiciously specific) $629 buying?

since private goods are non-rival it is efficient to exclude consumers who aren't willing to pay

Should this be, "since private goods are rival it is efficient..."?

Have you looked at Cowan's The Theory of Market Failure? If not you might find it of some interest.

Personally I would challenge the claim the claim of under provision due to a free-rider problem. The above collection of essays show a number of example of largely private provision of public goods where there are very clear potential for free-riding.

While the cases described in the book are not such that they could be said to be the last word on the question of public goods and under provision they do point to need to deal with the question in a more detailed manner related to specific cases I think.

My intuition is that if one does go meet the devil in the details on some case where some public good is not getting produced we'll find that the production costs actually well exceed the total consumption value. Pushing that type of project through then changes the free-rider problem into one of forced carrying (and I think well studied under different names in Public Choice literature).

In cases where we're saying we're not producing "enough" of the public good, I think we're equivocating a bit here. Clearly that call implies we're not actually dealing with a public good, in the true definitional sense, as the complaint here is that some are being under served/excluded. In other words, the good is not really non-rival or non-excludable. In these cases I wonder if it would not be better to think of these types of goods in the same way classical economists thought about economic rents -- some value that is getting captured because of locational impact (be it closer to market or greater fertility of the land). In this type of situation I don't think the public good solution will necessarily be a good solution for the actual problem -- wrong tool is getting used. The case of all someone has is the hammer so all problems look like nails.

I have had an academic interest in using assurance contracts in the social domain for a few years now. Like the author, I want them to be a reality but making that happen isn't my forté. My profession is research, not implementation.

I've written a few overviews of the idea for grants before. Here's one: https://cashman.science/wp-content/uploads/2023/09/Assurance_description_v11.pdf

The basic idea is this:

When we import this mechanism into the social domain, an assurance contract is an agreement something like an open letter—with the exception that the signatures on the letter become public only after some safety conditions (analogous to the provision point) are fulfilled. At a university it might look like this:

We, the undersigned believe [controversial idea we might be punished for expressing] and think the University should take the following steps [1, 2, 3…]. Signatures on this letter will become public only when there are at least [60] signatures from tenured faculty, [150] signatures from pre-tenure faculty, and [400] signatures from students. Until then, no one except the keeper of this letter can see who has signed.

This serves to make expressing a controversial (or controversial-feeling) idea much less costly: while a single hand raised in dissent might get cut off, a thousand can be safely raised together.

If anyone is interested in working together to make assurance contracts in the social domain a thing drop me a line. I'd love to see it happen.

But guess what: information is a public good! That means that it's currently underfunded.

There seems to be some unstated assumptions here, since it superficially appears like you've made a logical leap. 

Underfunded according to who? And for what types of information?

What are the transaction costs if you need to do 3 transactions?
1. Get the refund bonuses from the producer
2. Get the pledges from funders
3. Return the pledges + bonus if it doesn't work out

Also, will PayPal allow this type of money sending?

Congrats on getting funded way above your threshold!

I like the idea of DAC and would like to see them available and used more widely but I'm not confident that this project is the way to move that forward. Mention is made of Kickstarter: is there any knowledge of Kickstarter or GoFundMe being approached and asked to implement this functionality? It's likely to be a more effective use of time than to implement this on a new unknown and untrusted platform. Ideally, Kickstarter and/or GoFundMe would add DACs as an option to the campaign creator and ideally donators would be able to opt out (some will dislike the option and will get utility out of altruistically forgoing the potential refund bonus). 

Focusing on existing platforms:
* makes campaigns much more visible as these sites already have traffic
* leverages trust in the existing platforms
* leverages the stability of the existing platforms
* leverages the expected longevity of the existing platforms

I applaud your intent, commitment and willingness to put in the effort of implementing pushing this, and I think it has a niche ("better kickstarter" isn't bad). However, I think the main problems in reality will be dealing with delivery failure/scams, transaction costs, market sizes (a lot of public goods aren't that public, minority concerns often don't  get serviced by firms because of simple non-profitability),  and threshold behaviour (when the value estimate for each person is washed out in the uncertainty noise and the refund is negligible due to fees).

You might also want to ask yourself, 

1. will you be happy if this only works for club goods? I think here the private entrepreneurial case is much stronger, and even in the original paper a lot of the discussion of strongest equilibria is for $K=N$ and club goods. 
2. What mechanisms other than "culture" can you think of to stop the "raise a bunch of money, then put ads in anyway" or other rent-seeking behaviour can you think of? If we could build a careful  culture easily, we wouldn't need mechanisms like this, and I'd argue the OS community has its strong culture because it widely rejects commercialization and profit motives (or at best begrudgingly accepts people need to eat) and instead operates in the social domain, not in the transactional domain (think of the difference of paying you 25 bucks for help me moving vs. asking you to help me move and buying pizza + drinks for 20 bucks), which you would probably lose.

I would have contributed... if I hadn't been required to use Paypal. I closed my account a while back.

Could we extend dominance assurance contracts to include retrodiction markets? See here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4323607

Surely, there is a clever mechanism that can fix this issue? So I went to the Wikipedia page of the Free-rider Problem and scrolled to the bottom, and lo and behold it was just sitting there: Dominant Assurance Contracts.

I feel like every assurance-contract proponent went through a moment like this. It's like "Don't Look Up" except wrt a civilization-scale solution. I'm tempted to think some people 'just don't get it' because they're missing gears-level models re coordination problems in the first place, but that would be hasty.