After reading the comments and re-reading the article, I think it’s a little confused. The central conclusion, that this crowdfunding model is more effective and would help us fund more things we want, is correct (as I also argued in my own post). But I think some of the reasoning and examples are wrong. I’ll try to explain.
Free riding is the wrong framing in most cases
In your road example, you changed the condition from a funding goal ($90), to a backer-amount goal, in order to force everyone to pay if they want to have a road. I think this is both undesirable and irrelevant in most cases:
Irrelevant: Except in small and well defined communities, most crowdfunding campaigns target a large population that’s hard to quantify and single out. And most campaigns don’t need everyone who would benefit to back them, only enough of them. If you tried to do a campaign where everyone who would benefit from the it has to back it for it to succeed, it would definitely fail.
Undesirable: The fact that a good is public doesn’t mean that everyone benefits from it the same amount, because not everyone values it the same amount. In your example, the villagers probably value the road differently (perhaps based on how much they drive). It makes sense that people will pay differently based on how much they value the good. If we fund a Brandon Sanderson adaptation, it makes sense that the hardcore fans will pay a lot for it and I would pay little, because I want it, but not as much as they do.
Which is why crowdfunding campaigns use an amount of money as the goal instead of the amount of backers. But if you use funding-goal instead of a backers-goal, and people collectively value what you offer more than what you ask for it, then you still have the possibility of free riding, because it would be possible for the campaign to succeed without everybody (I think this is fine).
The goal isn’t to eliminate free-riding, it’s to prevent projects from failing because people try to free ride, and these are very different things, because the latter means you’re willing to tolerate free-riders as long as the project gets funded, and former means you’re unwilling to tolerate free-riding even if the project could otherwise be funded.
So, though DACs do reduce free-riding, and do probably allow people to donate less each and still reach the goal, they don’t completely solve free riding because you’d rarely want to use them in such a way where they do (which is why you implement refund compensation but don’t require certain amount of participation or set the price so high that everyone would need to participate).
As @Yair Halberstadtsaid, the problem this actually solve is the coordination problem faced by people who want to back the project if it succeeds, but don’t want to pay the cost of backing a failed project. In that sense, refund compensation is a very natural extension of of the Kickstarter model, because it simply recognizes that people need to be refunded for their effort and not just their money.
About your element/matrix example, the problem is indeed free-riding, but DACs would only solve the problem if he wouldn’t keep developing it unless he got a certain amount of funding (which would make it a coordination problem). If he doesn’t want to condition the development on a certain level of funding, then funding will be based only on the goodwill of people. So DACs also don’t solve cases where a reward is deserved, but you’re gonna do the thing regardless.
And because of the title, would a DAC be a good way to raise money for asteroid deflection? Definitely not as a way to try to make everyone participate in funding the deflection. It’s a good solution only if there’s a minimum amount of funding or backers you can do it with, and with any less than that you may as well not bother. But that doesn’t seem like a good idea. If you get $5 or 1 person less than you asked for ate you just gonna do nothing? Or would you rather try anyway and die with dignity?
Public/private goods
I think the focus on public goods in the post is a bit confusing. Not because it’s a problem to have and offer that as the main motivation for this, but because it makes it seem like it’s only relevant for public goods, where it’s still as relevant for private goods if there’s a big upfront cost to producing any at all, so you have to have a minimum number of customers. For example, designing a product is a large cost that you have to pay upfront, but it also doesn’t scale with the amount of products sold. So it makes sense to say ‘I will sell this only if there’s enough buyers to cover the design cost’. Most crowdfunding campaigns for private goods are exactly of this type, and would benefit almost as much from refund compensation as public good campaigns (and it should sadded us that they fail due to a coordination problems as well, because even though it’s a private good it’s still lost value).
I agree with this comment except for these two points
About your element/matrix example, the problem is indeed free-riding, but DACs would only solve the problem if he wouldn’t keep developing it unless he got a certain amount of funding (which would make it a coordination problem). If he doesn’t want to condition the development on a certain level of funding, then funding will be based only on the goodwill of people. So DACs also don’t solve cases where a reward is deserved, but you’re gonna do the thing regardless.
I don’t think he is going to do it regardless. Presumably if he doesn’t get enough money he has to shut-down his company completely or reduce the amount he spends on open-source and focus on the more profitable consulting side of the business. If DACs were used they could invest more in the open source.
I think the focus on public goods in the post is a bit confusing. Not because it’s a problem to have and offer that as the main motivation for this, but because it makes it seem like it’s only relevant for public goods, where it’s still as relevant for private goods if there’s a big upfront cost to producing any at all.
Private goods already have a mechanism to solve this problem: investment. That’s why I think DACs are not that relevant for private goods.
In the case where he has a minimum amount below which he is unwilling to continue development, then I agree a DAC would help raise that amount.
Investment solves the funding problem, it doesn’t solve the problem of making sure you have enough buyers. And if you can’t solve the latter then you might not be able to get investors either (cause they also want to know you have enough buyers). That’s the problem Kickstarter solves, and DACs would solve wven better, in addition to funding.
After reading the comments and re-reading the article, I think it’s a little confused. The central conclusion, that this crowdfunding model is more effective and would help us fund more things we want, is correct (as I also argued in my own post). But I think some of the reasoning and examples are wrong. I’ll try to explain.
Free riding is the wrong framing in most cases
In your road example, you changed the condition from a funding goal ($90), to a backer-amount goal, in order to force everyone to pay if they want to have a road. I think this is both undesirable and irrelevant in most cases:
Irrelevant: Except in small and well defined communities, most crowdfunding campaigns target a large population that’s hard to quantify and single out. And most campaigns don’t need everyone who would benefit to back them, only enough of them. If you tried to do a campaign where everyone who would benefit from the it has to back it for it to succeed, it would definitely fail.
Undesirable: The fact that a good is public doesn’t mean that everyone benefits from it the same amount, because not everyone values it the same amount. In your example, the villagers probably value the road differently (perhaps based on how much they drive). It makes sense that people will pay differently based on how much they value the good. If we fund a Brandon Sanderson adaptation, it makes sense that the hardcore fans will pay a lot for it and I would pay little, because I want it, but not as much as they do.
Which is why crowdfunding campaigns use an amount of money as the goal instead of the amount of backers. But if you use funding-goal instead of a backers-goal, and people collectively value what you offer more than what you ask for it, then you still have the possibility of free riding, because it would be possible for the campaign to succeed without everybody (I think this is fine).
The goal isn’t to eliminate free-riding, it’s to prevent projects from failing because people try to free ride, and these are very different things, because the latter means you’re willing to tolerate free-riders as long as the project gets funded, and former means you’re unwilling to tolerate free-riding even if the project could otherwise be funded.
So, though DACs do reduce free-riding, and do probably allow people to donate less each and still reach the goal, they don’t completely solve free riding because you’d rarely want to use them in such a way where they do (which is why you implement refund compensation but don’t require certain amount of participation or set the price so high that everyone would need to participate).
As @Yair Halberstadt said, the problem this actually solve is the coordination problem faced by people who want to back the project if it succeeds, but don’t want to pay the cost of backing a failed project. In that sense, refund compensation is a very natural extension of of the Kickstarter model, because it simply recognizes that people need to be refunded for their effort and not just their money.
About your element/matrix example, the problem is indeed free-riding, but DACs would only solve the problem if he wouldn’t keep developing it unless he got a certain amount of funding (which would make it a coordination problem). If he doesn’t want to condition the development on a certain level of funding, then funding will be based only on the goodwill of people. So DACs also don’t solve cases where a reward is deserved, but you’re gonna do the thing regardless.
And because of the title, would a DAC be a good way to raise money for asteroid deflection? Definitely not as a way to try to make everyone participate in funding the deflection. It’s a good solution only if there’s a minimum amount of funding or backers you can do it with, and with any less than that you may as well not bother. But that doesn’t seem like a good idea. If you get $5 or 1 person less than you asked for ate you just gonna do nothing? Or would you rather try anyway and die with dignity?
Public/private goods
I think the focus on public goods in the post is a bit confusing. Not because it’s a problem to have and offer that as the main motivation for this, but because it makes it seem like it’s only relevant for public goods, where it’s still as relevant for private goods if there’s a big upfront cost to producing any at all, so you have to have a minimum number of customers. For example, designing a product is a large cost that you have to pay upfront, but it also doesn’t scale with the amount of products sold. So it makes sense to say ‘I will sell this only if there’s enough buyers to cover the design cost’. Most crowdfunding campaigns for private goods are exactly of this type, and would benefit almost as much from refund compensation as public good campaigns (and it should sadded us that they fail due to a coordination problems as well, because even though it’s a private good it’s still lost value).
I agree with this comment except for these two points
I don’t think he is going to do it regardless. Presumably if he doesn’t get enough money he has to shut-down his company completely or reduce the amount he spends on open-source and focus on the more profitable consulting side of the business. If DACs were used they could invest more in the open source.
Private goods already have a mechanism to solve this problem: investment. That’s why I think DACs are not that relevant for private goods.
In the case where he has a minimum amount below which he is unwilling to continue development, then I agree a DAC would help raise that amount.
Investment solves the funding problem, it doesn’t solve the problem of making sure you have enough buyers. And if you can’t solve the latter then you might not be able to get investors either (cause they also want to know you have enough buyers). That’s the problem Kickstarter solves, and DACs would solve wven better, in addition to funding.