X Prize Annuity Funds
In the March 9, 2008 Sunday Magazine section of the NY Times, Freakonomics authors, Stephen Dubner and Steven Levitt wrote about an idea I shared with them (with my permission of course). Given all of the interest and critique that’s resulted, I am posting the original conception below and encourage you to express your thoughts about the project either in the comments here or on the Freakonomics blog. If you are interested in becoming involved beyond just providing public input, just say so in your comment and I will contact you directly.
There are some very big problems in the world that can be solved but only if there is collective will to do so. Global warming, curing cancer, poverty traps, and so on. Free markets alone cannot get us there because of inherent externalities and insufficient market structure geared towards the problems at hand. One way this has been addressed is via internalizing externalities (e.g. pollution markets). But such an approach requires global political consensus for most big problems. Another approach that obviates this roadblock is to externalize incentives with large cash prizes, ala the X Prize Foundation. What I propose is to set a self-organizing system for the X Prize approach, but for arbitrary problems of interest to a critical mass of philanthropic citizens.
The basic idea is a series of close-ended prize funds targeted at specific problems with specific fundraising goals. There are three stages: fundraising, pre-award, post-award. In the first two stages the fund returns interest. Once the prize is awarded, the principal is a charitable donation and the fund is dissolved. Each individual investor (be it a person or an organization) receives one vote irrespective of their capital contribution. Each year during the pre-award stage the fund votes on whether the goal has been achieved. Once it has, all claims on the prize are vetted and formal decision process is used to award the prize, possibly across multiple claimants in differing amounts.
Example: Cure Cancer Annuity Fund
- Opens in 2010 with the simple goal to “cure cancer”
- Fundraising target: $10B
- Minimum investment: $10K
- Interest rate during fundraising: 15%
- Fundraising goal is reached in 2013
- Fund consists of a combination of 9347 investors
- Includes individuals, corporations, charities and trusts
- Guaranteed interest rate during pre-award: 5%
- Award is adjusted for inflation
- Excess returns beyond 5% are dividended out pro-rata
- Cure cancer goal vote achieves super-majority in 2020 after creeping up each year prior
- Prize is awarded in differing amounts to 34 different recipients
- Range is from $4B to $2M
- Recipients include individuals, corporations, academic institutions, non-profits and collectives thereof
- Decision process is done via percent allocation aggregation:
- Each investor gets 100 units to allocation to claimants in any combination
- Allocations are added and normalized to 100%
- Depending on each investor’s local tax structure they may receive credit for:
- Capital contribution post-award
- Capital contribution at point of investment
- Exemption from tax on interest
Please note that the above is straw-man example, just a starting point. No doubt the model can be improved upon in many ways. If you have ideas on how to do so, please share below in the comments!