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.
