IN RESPONSE TO testing shortages, the CDC—under direction from the White House—now recommends testing only the symptomatic. The fewer tested, the fewer bottlenecks. This means the virus will continue to spread unchecked through the asymptomatic, taking more lives and shuttering schools and businesses along the way. Luckily, there is an innovative financing system called quadratic funding that can spur the investments in testing capacity we need. Proposed two years ago, quadratic funding has already been used to align incentives to build public goods like decentralized, open-source software projects. Despite the geeky name, it has a simple fundamental logic: It rewards cooperation.
Cooperation between states is key. With collapsing tax revenues, many states are cautiously buying only the tests they need today. This has led to volatile demand and expensive zero-sum bidding wars during outbreaks, where big states crowd out small states. States would be better off if they coordinated massive purchase guarantees to test suppliers, who would in turn rapidly build capacity at lower costs. The problem is states would rather conserve cash—pinning their hopes on a vaccine or breakthrough therapeutic—than contribute scarce funds for a demand shock.To illustrate how quadratic funding works, take a simple example. Say there are four compacts, each funded a total of $100 million, comprised of two, four, six, and eight states respectively. In quadratic funding, the $5B bonus pie would be divided among them in a 1:3:5:7 ratio. The smallest compact with two states would be rewarded the least ($313 million), the largest compact with seven states the most ($2.2 billion), seven times as much.
Quadratic funding has more front-end complexity than matching, but the “square of the sum of the square roots” principle can scale within budgets without distortions by caps. Funds are balanced across states based on their relative level of cooperation and contributions to compacts. Rich infrastructure states don’t hit a ceiling cap, but can always get more funding by cooperating with poorer states, who in turn get more funding than linear matching. Quadratic funding spurs states to both have skin in the game and compete in positive-sum cooperation, rather than gaming an arbitrary formula for a fixed slice of a fixed pie. We’ve already seen quadratic inroads in digital infrastructure. Since January 2019, GitCoin—a nonprofit that provides grants to open source developers—has run six quadratic funding campaigns to allocate $2.5 million for open-source digital infrastructure projects. Each campaign has averaged 1,200 donors. Projects with the most popular support were matched at higher ratios such as 1:4, while projects with few contributors achieved matching ratios closer 1:1
Quadratic funding could spur states to build the testing infrastructure we need to stop this pandemic. Millions of tests a day would empower states to suppress the virus to near-zero incidence through testing, tracing, and supported isolation––a strategy that has proven to work in other advanced market economies like Taiwan, South Korea, and Germany. But without cheap and abundant tests, states can’t move beyond the false choice of lockdowns or letting the disease rampage, both of which destroy lives and the economy. If Congress offers a $5 billion incentive to states, it should be quadratic. This innovative funding design could be key to saving lives and livelihoods.