A Theory of Social Finance

A myriad of different types of institutions are involved in social finance. This paper attempts to make sense of the diverse ways of operationalizing the delivery of funds to social enterprises by socially-motivated financial... [ view full abstract ]

A myriad of different types of institutions are involved in social finance. This paper attempts to make sense of the diverse ways of operationalizing the delivery of funds to social enterprises by socially-motivated financial institutions. It explores the continuum of feasible funding that goes from pure grants to loans at market conditions. All these face information asymmetries, and subsequently arbitrate costly social screening against social contribution. The conditions under which social screening is counter-productive is determined. We analyze in analytical and numerical ways the optimizing behavior of the different categories of social funders, concluding that establishing ‘quasi-foundations’ (owned by funders requiring only part of loans to be repaid) would increase the amount of social contributions generated, assuming that imposing financial constraints on projects without having to transfer financial surpluses to the funders can allow self-funded social contributions in future periods.