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Funding Public Goods with Quadratic Funding
Quadratic funding is a very interesting mechanism for allocating centralized funds to public goods. It helps people communicate their degree of preference for certain goods while also penalizing extreme preferences.
Quadratic funding is a very interesting mechanism for allocating centralized funds to public goods. It helps people communicate their degree of preference for certain goods while also penalizing extreme preferences.
Funding Public Goods with Quadratic Funding
Quadratic funding is a very interesting mechanism for allocating centralized funds to public goods. It helps people communicate their degree of preference for certain goods while also penalizing extreme preferences.
Libraries are my favorite example of a public good! Ft. Boston Public Library.
Libraries are my favorite example of a public good! Ft. Boston Public Library.
Libraries are my favorite example of a public good! Ft. Boston Public Library.
Libraries are my favorite example of a public good! Ft. Boston Public Library.
What are public goods?
The laptop in front of you is a private good. The production of private goods is governed by free-market economics. A corporation motivated by profit produces a limited quantity of laptops. Consumers like yourself purchase the laptop once its perceived benefits outweigh the price. But who governs the production of public goods? Since they’re accessible in infinite quantity and without charge, there’s minimal incentive to pay for the received benefits. Uncensored journalism and recreational spaces, among other public goods, have clear societal and individual benefits and require sustained funding. Still, rarely they are funded directly by public who uses them. Instead, we rely on existing social mechanisms to fund public goods.
Existing mechanisms for funding public goods
There are three main sources of funding for public goods. First, by privatizing public goods. If you need reasons why this might be a bad idea, look no further than the US private healthcare system. Thousands are spent on insurance premiums, uninsured and underinsured people are unable to access care, higher likelihood of foregone treatments, and serious conditions are left undiagnosed and untreated. Second, via cultural and moral persuasions. Americans give around 2% of their disposable income to charities. Typically, causes with the highest social visibility get the most funding, which constraints the variety of public goods that get funded sustainably. Third, through centralized funding methods like gov't taxation. While this method is best for making sure public goods get sufficient long-term support, there are still challenges of prioritizing between goods in a way that is public-approved and efficient. Ideally, it would also be great if this method had some supplementary mechanisms to encourage the public to chip in extra to support causes they care most about. This is where Quadratic Funding could help.
Existing mechanisms for choosing what goods to fund
Once the funding is generated, the next challenge is deciding how to distribute it among the public goods. Traditional allocation mechanisms fail to account for broader public preferences, and if voting is employed, the choices are often disproportionately influenced by wealthy voters or majoritarian interests.
What is QF and how it works
Let's start by summarizing the main assumptions - we want some form of centralized funding coming from the government that's preferably supplemented by public donations, and we want this funding to be allocated to public goods that people care about.
Quadratic funding (QF) is an alternative funding allocation mechanism that helps capture information about public preferences, while also incentivizing people to chip-in. In QF, people use currency-equivalent donations to vote on public goods they want funded. Donations are matched by funds from the centralized pool (let's say gov't money, or a sizable donation from a donor who wants to support a community). The more a given public good is important to you the bigger donation you would make to express tour preference. You might say, wait a second, this looks like the rich will get all the money from the matching pool because they can donate a lot more. Not so fast. This is where QF's real job begins.
I'll let you in on a secret. QF is really just an equation. And though it looks scary, it's one of the good ones!
It is used to calculate the votes (expressed in donations) to determine how much utility public would get from each good. It's most important contribution is capping how much influence a single donation can have on the final funding distribution.
Total utility of a given public good is calculated by summing up the square roots of individual contributions and then squaring the total.
The key is the square root transformation! It diminishes the voting power of high-value donations. This means public goods with many small contributions will get more matching funding than public goods supported by fewer big donors.
A little example (plz bear with the math, it's simple!)
Consider the following example where individual contributors donate to three public projects competing for a centralized funding pool of $1,000.
Project A is supported by 2 people, each donating $300. Total QF utility = (√300+√300)² = 1,200.
Project B is supported by 10 people, each donating $30. Total QF utility = 3,000.
Project C is supported by 30 people, each donating $2. Total QF utility = 800.
Centralized funding is meant to fill the utility gap between the total QF utility and the amount donated by individual contributors.
Donations are matched proportionally:
Project A gets 1,200 (project utility) /5,000 (total QF utility across all project) = 0.24. So, this project gets 24% of the $1,000 pool, an equivalent of $240.
Project B — $600
Project C — $160.
This example highlights important benefits of quadratic funding:
Restriction on voting power: Quadratic formula clearly diminishes the influence of wealthy contributors or contributors with extreme interests. Project A got the highest private contribution, but because only two donors supported it, it received just 24% of the matching pool.
Counter-majoritarianism: Even though a majority somewhat prefers Project C, Project B got the largest portion of the funding pool because, on average, it was highly valued by individual contributors. This means, with the help of QF, minority can still influence funding distribution by communicating a stronger preference.
Increased incentive for public to chip-in to fund public goods: individuals get to significantly influence what public goods get funded, all in exchange for small donations. It's a win-win, public gets a say and more money goes to public goods.
Thanks for turning in and let's fund more public goods!
Future Readings:
A QF white paper with all the math explained by the masterminds themselves
A podcast by Kevin Owocki on how QF helped local businesses in Colorado recover from COVID-related economic distress
Future Readings:
A QF white paper with all the math explained by the masterminds themselves
A podcast by Kevin Owocki on how QF helped local businesses in Colorado recover from COVID-related economic distress