Valuing Pay-For-Success Contracts In Social and Financial Innovation: A Put Spread Formula

Pay-for-success contracts are social and financial innovations in social policy and capital markets, respectively. This paper argues that they exhibit option-like payoffs and implements standard option-pricing arguments in assessing the value of investing in pay-for-success contracts. Sensitivities vis-à-vis contract specifications are reflected in the valuation formula and help reach investment and social policy decisions.