Nearly half of 16-to-18-year-olds released from New York City’s Rikers Island prison are back within a year—a trend the government doesn’t have the cash to reverse. So last fall, Mayor Michael Bloomberg inked an unusual contract with Goldman Sachs. The bank would put up a $9.6 million “investment” to teach 10,000 young offenders moral reasoning before August 2015. If these teens stay out of jail, the city saves money and Goldman Sachs will make a 22 percent profit. If not, the government pays Goldman nothing.

The new social-impact bonds—also known as pay-for-success contracts—use private-sector money to run prevention programs that would save the government money down the road. Taxpayers reimburse investors only if a program saves money compared with government services, bringing market discipline to the social sector and, advocates hope, attracting long-term funding to proven interventions. After Rikers, the first SIB contract in the United States, others followed: President Obama requested $485 million for SIBs in his last budget, and several federal agencies have already made money available, including $20 million from the Labor Department. Massachusetts has authorized $50 million to finance two social-impact bonds, New York state has requested suggestions, and Illinois plans to do the same.

At this early stage, there’s no standard SIB formula. But the basic structure may mirror the Rikers Island contract. In that case, a research organization called MDRC identified cognitive-behavioral therapy as a proven approach to reducing recidivism, citing studies such as a 2007 meta-analysis from the Vanderbilt Institute for Public Policy Studies in which teaching detainees how to better think through their behavior reduced recidivism by 25 percent. MDRC acted as an intermediary, coordinating the deal between the city and Goldman. It will manage the loan and oversee the Osborne Association, a nonprofit prison-reform organization, as it brings cognitive-behavioral therapy to Rikers....

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