Ana Ivanovic was from a poor Serbian family but wanted to become a professional tennis player. When she was 14 her parents found a Swiss businessman who spent a total of $500,000 on her training in Switzerland in exchange for a share of her future earnings. Years later, Ivanovic signed a multimillion dollar sponsorship deal and eventually became world number one. She achieved her dream, and so did the businessman.
To help match cash-stripped aspiring athletes with venture capitalists wishing to emulate this successful investment, Cindy Yim, an ex-Deutsche Bank employee, recently created an online Jock Market where investors can buy shares of promising athletes. But would-be professional athletes seem not to be the only ones overlooked by conventional financiers. A similar website, thrustfund.com, aims to sell shares of social entrepreneurs. Jon Gosier, a 28-year-old engineer behind AppAfrica, a venture investing in African software, is offering 3% of his future salary in exchange for $300,000.
Is this a new and radical way of thinking about finance? In reality, it’s more like an old idea that never really caught on.
Income contingent loans, as this type of financing has been known, were first imagined by Milton Friedman, a Nobel laureate in economics. Reflecting on the role of government in education, he had suggested the state engage in equity investments in students rather than provide loans deemed too risky by the market. But only in a few countries, such as Australia, did the practice flourish. This was partly due to the perception of it as immoral, equivalent to partial slavery. Things may be about to change. On top of these newfangled websites, academic voices are also getting louder.
According to Bruce Chapman, of the Australian National University, the vast majority of OECD countries could implement viable income contingent loan programs. The financial crisis has left many public universities in the red and governments are in no position to help. In a recent CEPR Policy Insight, Neil Shephard of Oxford University urges the UK government to allow universities to charge income contingent tuition fees. Well-functioning taxation systems are already in place to efficiently collect student charges.
Robert Shiller, of Yale University, even suggests governments should sell shares of their countries. “Trils” would pay a coupon of one-trillionth of nominal GDP and act as a natural hedge against budget shortfalls in times of recession. Investors, on the other hand, would be protected against possible inflation outbreaks. African countries could hence tap the market instead of relying on foreign aid or facing the prohibitive interest rates of debt. Greece, with few options left, could also experiment with Trils.
Despite financial constraints across the board, from poor aspiring athletes to sloppy governments, the world may be in no mood for financial innovation, seeing it as the cause of the last financial crisis. An old and simple idea could thus be timely.