Dominant Assurance Contract, Also Known as Refund Bonus, Explained
Key Takeaways
- •Alex Tabarrok says he developed the dominant assurance contract, also called the refund bonus mechanism, in 1998.
- •He says he and Tim Cason and Robertas Zubrickas have tested refund bonuses in laboratory experiments and found they work.
- •The article uses a dike as an example of a public good because nearby residents benefit even if they did not pay for it.
- •The post cites Paul Samuelson’s 1954 view that people have incentives to understate their interest in public goods and that decentralized pricing cannot set them optimally.
- •Tabarrok argues that refund bonuses offer a way to support some public goods by aligning private participation with collective provision.
Alex Tabarrok says he created the dominant assurance contract, also known as the refund bonus mechanism, in 1998. He describes it as a mechanism capable of privately producing some types of public goods, which is notable because public goods are often treated as a case where voluntary markets struggle to coordinate contributions. In recent years, working with Tim Cason and Robertas Zubrickas, he has tested refund bonuses in laboratory experiments and says they work.
Tabarrok says he has written an accessible Refund Bonus Explainer that covers this body of work. He highlights the example of a dike as a public good. Once built, it protects everyone nearby, and a neighbor who contributed nothing cannot easily be excluded. That non-excludability makes public goods difficult to finance.
He notes that Paul Samuelson defined public goods in 1954 and was pessimistic about their prospects. Samuelson argued that each person has an incentive to understate how much the good is worth to him. In his words, it is “in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has.” Samuelson concluded that “no decentralized pricing system can serve to determine optimally these levels of collective consumption.” On that view, public goods are what governments are for.
Tabarrok says refund bonuses challenge that conclusion by offering a mechanism meant to align private participation with collective provision rather than relying only on traditional public financing.
He adds, “Read the whole thing,” and points readers to his Rent Control Explainer.
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