Results-Based Financing.
Paying for outcomes instead of inputs sounds like a panacea for development efficiency. In reality, the transaction costs of verification and the risk premiums demanded by investors often outweigh the benefits.
The Theory
Traditional aid pays for inputs (textbooks, teacher training). Results-Based Financing (RBF) pays for verified outcomes (students passing a literacy test). The implementer is free to innovate, assuming the financial risk if they fail to deliver.
Development Impact Bonds (DIBs)
In a DIB, private investors provide upfront capital to the implementer. An independent evaluator measures the outcome. If the target is met, an "outcome funder" (usually a donor agency) repays the investors with a premium.
The Transaction Cost Problem
Structuring a DIB requires lawyers, financial intermediaries, independent evaluators, and months of negotiation over outcome metrics.
In early DIBs, design and evaluation costs frequently exceeded 20-30% of the total project value—a devastatingly inefficient overhead structure compared to traditional grants.
Perverse Incentives
When payment is strictly tied to a specific metric, implementers face immense pressure to "teach to the test" or engage in "cream-skimming" (selecting the easiest beneficiaries to help, ignoring the most marginalized). Rigorous, independent verification is required to prevent this, further driving up costs.