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Why quadratic funding is not optimal

Introduction Quadratic funding has received a lot of attention recently as a mechanism for funding public goods—especially in the cryptocurrency space. QF is appealing because it is theoretically optimal under certain assumptions1.\nThe problem is that these assumptions don’t ever hold in reality.\nThe theory behind QF is sound and elegant, and the authors of the original paper are clear about the assumptions. They don’t claim they are likely to hold in reality, and warn about the consequences when they don’t hold. Unfortunately, practitioners have sometimes been too enthusiastic, implementing QF in settings where theory actually predicts poor results.\n

Intuitively, this seems wrong: the art museum receives a far larger subsidy, yet many more people benefit from replacing the lead pipes, and the utility-per-individual is arguably much higher as well. Without enough subsidy to cover every project’s theoretical deficit, QF ceases to have one guaranteed best outcome and instead admits many equilibria—none of which reliably maximizes welfare. I am not aware of work on variants of QF designed to address the other assumptions described in this paper: wealth inequality, costly subsidies, failure to realize the equilibrium, and imperfect knowledge of projects.

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