Clawback contracts are costly

Governments like to use clawbacks, in which they provide a benefit but demand it back if some objective is not reached. North Carolina uses clawbacks for some tax incentives, but could not recover millions of dollars that had been paid to Dell Technologies when that company closed a plant in Forsyth County in 2011.

Authors of a recent working paper suggest the harm from clawbacks is even greater. Lamar Pierce of Washington University in St. Louis and Alex Rees-Jones of Cornell University teamed up with Charlotte Blank, the Chief Behavioral Officer at Maritz, to learn that car dealers with clawback-type contracts sold 5% fewer vehicles than those with financially identical contracts without clawbacks.

Yet another reason for government officials to consider pay-for-success contracts such as social impact bonds.

Joseph Coletti / Senior Fellow

Joe Coletti is a senior fellow at the John Locke Foundation focused on fiscal policy issues. He previously headed the North Carolina Government Efficiency and Reform initiativ...

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