On donations

It's the season of charity and donations and I am going to write against donations. Well, not exactly, but I do have some bad things to say about humanity.

The problem with donation is of information. When you buy a product, you own that product. Then you can assess how good the product is and perhaps even share your assessment. Eventually, consumers gain knowledge of the value of these products and companies that fail to produce quality products at competitive price will be driven out of the market.

On the other hand, when someone donates money the benefit is given to whomever the donor wants to help. The donor rarely gets any information to assess the value of his donation; if you give $1000 to UNICEF, what exactly does it do? The answer to such a simple question is rather difficult to have and consequently choosing a charity to make donation is difficult. If you want to improve the well-beings of African children, should you donate to UNICEF, Save the Children, Invisible Children, the Gates Foundation, or Amnesty International? Most likely, same amount of money given to each of these organizations will lead to different results, some improving the life quality of the children more than the others. Yet there is no way for a person to gain this information. Compare this to, for example, buying a TV. The potential buyer will present himself with different options, consider the pros and cons of each of them, and then make the final decision based on the cost-benefit analysis. This process is largely omitted when someone decides to donate to charity as the information is simply unavailable.

I am claiming that this problem arises as the buyers (donors) differ from the consumers (beneficiaries of the charity) but let me go little further. The task of measuring the value of charity program is a difficult one; much more difficult than measuring the value of say a TV. Suppose a charity has fund to spend on helping people in Ethiopia. It can buy lots of food with the money and give it out to people. It can try to assist building infrastructure. It can lend out money to farmers hoping the investment will increase the output. It can raise the awareness as to increase the future fund to help them. It can run a campaign to reduce the US and EU tariffs on sugar, among other agricultural products that Ethiopia produces. Measuring the benefits of these programs is difficult but nonetheless important, since some actions, no matter how well-intended, can do more harms than goods. It is by now well known that foreign aid in simple form of giving out foods foods can hurt the local economy and foster long-term dependency.

Now, the charity organization could spend some of its fund to figure out what would be optimal choice. There is some effort to do this, but we know remarkably little about how effective and efficient various measures of aids are. We need to learn the economy, people, their needs, what works and not, what is sustainable. And before we have learned this, we need to be more careful and avoid doing things that we think will do good. Lives are lost due to this inefficiency.

Let me trace back a little. I don't want to just argue that there is inefficiency in the charity market. I want to argue that this inefficiency is inherent. So let me go back to my old point: the existence of a charity organization does not depend on how successful it provides its intended aid but on how successfully it collects donations. As pointed out earlier, this problem arises because the buyers and consumers are different. But why is this really a problem, if the donors actually care about the well-being of those who are receiving the aid?

To give a dismal answer, this shouldn't be. If we really cared, then we would demand more information. We would demand to see the proofs that they are doing what they claim to be doing and that those actions are theoretically sound and empirically supported. We would demand that charities regularly provide reports on how well or poorly they are doing in terms of meeting their aims. We would demand to see a third party organization that tries to objectively measure the performance of different charity organizations, so that donors can make more informed decision.

Yet we do not, because what we care about is not other people, but our own moral satisfaction. It is disturbing to know that somewhere in the world there are children dying because they don't have food and fresh water. We feel guilty knowing that there are people dying of diseases that can be cured relatively easily with modern medical technology. We are uncomfortable with inequality and being on the better side without trying to help the other side. So the charity organizations provide satisfaction our moral needs by allowing us to donate money for humane purpose. The act of donating itself, rather than the improvement in the well-being of others, satisfies our moral need.

I am getting little too heated, so let me cool down and finish the post. I have argued that the charity market is inefficient, in the sense that the money collected from the donors by the organizations is not used in the optimal way to improve the life quality of the intended beneficiaries. This inefficiency arises because unlike other markets, those who pay for the product differ from those who consume the product. I argued, although admittedly without much evidence, that this problem will at least partially solved if the donors cared more about the actual well-being of the people who they intend to help. I believe that this will lead to organizations that evaluate different charity organizations in an unbiased way and make the information easily accessible. This would provide incentives for the charity organizations to minimize its current inefficiencies.

Edit (15 September 2012): Here is an interesting WSJ article that is somewhat relevant. I don't quite agree with every argument of the article, but I value the insight in the article that observed how charity market is fundamentally different from most other ones and how its efficiency can be improved.

On grade inflation

Has the US been experiencing a grade inflation? It is a fact that the average grade a student receives has been increasing over the past decades. Yet, this does not suffice to claim that there is a grade 'inflation' since to do so we must assume that the student ability has not changed over time.

First, we must agree on whether grade should be measured relatively or absolutely. In many cases, grades are measured relatively; a student grade often reflects how many standard deviations he is away from the median student of the class. In this case, grade inflation translates to a higher GPA number assigned to the median student. Yet, we would at least like to measure grades absolutely. In other words, grade should reflect the degree to which the student has achieved the course objectives. The relative measure is merely one way to overcome the difficulty of objective absolute grading.

If grades are measured absolutely, then the grade inflation must look not only at the time trend of the average grade, but also at the change in average student achievement. If students are on average learning more efficiently and therefore meet the course objectives to greater degree, then the average grade should increase. It is difficult to find empirical data on the degree student achievement since it is most commonly measured by GPA. There are, however, good reasons to believe that students on average learn better than they did before. The argument comes from two sides.

One side is that the college has become increasingly competitive. A fact: the average acceptance rate to universities is decreasing. There would be many reasons for this: increasing population, increasing returns to education, and decreasing transportation cost which increases the candidate pools by bringing international students. No matter what the reason is, it is undeniable that the selection to the university is becoming increasingly competitive, and therefore, if we believe that admission committee does its job and selects more able students from the candidate pool, then we should believe that the average ability of students is increasing.

On the other side, teaching become more efficient over the past decades. Students today have access to better textbooks, greater resources (much thanks to the Internet), and hopefully better teaching methods (due to slow but existing pedagogical progress), compared to students in the past. We would at very least hope that these improvements help students to learn, in which case an average student would achieve more learning objectives now than in the past.

This argument counters a claim that grade inflation causes students to be more lazy. To the contrary, it is an increase in learning efficiency that causes the seeming grade inflation. The only concern with the inflation is then that GPA may lose its signal value, but then again, that might not be a bad thing.

On school grades

Surely any teacher would be offended by the signaling theory of education. If people who go to school don’t come out any better, what does that imply about teachers? The theory seems to suggest that their only function is to make it costly for low ability students to go to school. I believe that most teachers strive quite the opposite. They would want to see improvements especially among the low ability students.

So why do schools assign grades to students? Grading serves as a mechanism to distinguish high ability students from low ability ones, so that the school can reward the high grade students and/or punish the low grade students psychologically, financially, or even physically.

If a school’s interest is to improve students’ abilities rather than to make itself a signaling mechanism, then it should abandon the grading system altogether. One could argue that grades can be used as incentives for students to work harder, but if this were to be true, then grades need to be based on marginal improvement. In reality, grades are based on comparison with others’ performances rather than with one’s own past performance. There is reasons to think that this form of grading can provide disincentives to put effort for low ability students.

By signaling mechanisms, schools that are harsher to low ability students are more popular, since attending such schools signal that students have high ability. If a grade-free school was introduced, such school would be less costly for low ability students, attendance to such schools will give bad signals, and thus the school will be driven out of the market.

What should we do, then? Make a collective effort to make schools grade-free. Schools, with the aim of improving students' abilities, can function without giving grades. On the other hand, grading system leads to early sorting processes potentially resulting in discrimination against low-income students (holding abilities constant, students from high-income families can more easily earn higher grade, earning potentially life-long advantage through signaling). Further, valuable resources are being wasted on grading in the sense that those resources can be put into better improving students’ abilities. Students want teachers, not graders.

On taste-based vs. statistical discrimination

Since in both labor and experimental economics class we are discussing about discrimination, I have been thinking on this topic for a little while.

It seems there is a general sentiment that taste-based discrimination is morally unacceptable, while statistical discrimination to some degree is permissible. A person who offers  lower wage to minority out of his dislike of the minority is contemptible, but who can blame an insurance company that charges different premium based on gender, age, race, etc.?

As usual, I find myself having controversial thoughts. I find taste-based discrimination to be at least in some cases more permissible than statistical one. Why is it wrong to hate, say, women, but acceptable to hate those who hate women? If an employer strongly believe that racism is morally unacceptable and offers lower wages to racists, is he wrong to do so? Surely one is entitled to have opinions and like or dislike certain type of people, whether that taste is based on “truth” or not.

Besides, there is a sense of reciprocity in taste-based discrimination in that the discriminators pay in order to discriminate. On one hand this reveals how discriminatory a person is, but on the other hand it seems more acceptable than essentially selfish behavior of profit-maximizing even when it involves discrimination. The former foregoes his own earnings in order to discriminate; the latter foregoes non-discriminatory behavior in order to earn more.

Furthermore, taste-based discrimination can be mutual in the sense discrimination can occur from either supply or demand side; a white employer can offer lower wage to black employee, but a black employee could demand higher wage from white employer. This mutuality disappears in statistical discrimination since this discrimination arises from asymmetry of information.

The main reason I find statistical discrimination so disturbing is that it seems potentially self-fulfilling in some cases. As a crude example, I think it is plausible to think as follows. Possibly originating from taste-based discrimination, minorities are less productive and thus the status of minority sends a signal to the employers. Statistically discriminating employers will offer lower wage to the minorities. Given lower income level, the minorities cannot invest as much on their children, and thus the second-generation minorities are less productive as well. The signal is thus confirmed and Bayesian-updating employers continue to discriminate.

Taste-based discrimination can disappear with the flow of time, but statistical discrimination will form a cycle if the discriminatory behavior has an averse effect on the relevant characteristics of the discriminated people. I find this kind of discrimination to be the worst.