Tuesday, June 2, 2009

How charitable is charity?

The other day, there were a couple of volunteers from CRY (Child Relief and You) who were trying to solicit some donations from residents in our apartment complex. I observed a few interactions between the volunteers and the potential donors and it was an interesting example of the homo economicus in action:
1. The first unusual fact was that most people were distinctly uncomfortable talking to the volunteers. This, I thought, was unusual - assuming that one of the key objectives of charity is a signaling mechanism to your friends/neighbours, one would expect exactly the opposite behaviour. One would expect people to be want to be seen to be associated with a cause - thereby signaling 'noble intentions'. 
2. The second fact was that not a single individual was willing to take a critical view of the charity. Assuming that you are a rational individual seeking to maximize utility out of the money you have allocated for charity, you should be working towards identifying the best possible way to spend that money. On that count, CRY is probably not the best option - their overheads are at 21%, which essentially means that for every Rs. 1,000 - only 790 goes to the end beneficiary. 

The second point brings me to a big problem inherent with the whole charity industry. It is obvious that charity is required in any society, because clearly there are areas which have not been served by the market. And like any market driven solution, it is healthy to have multiple competing charities and let the invisible hand allocate the charity money optimally among these charities (the standard libertarian argument) - however there are obvious flaws here:

a) Any market clearing system arrives at a price-clearing equilibrium through a process of trial and error (think stock markets) which is essentially an iterative exercise of identifying and closing out information asymmetries between the consumers and the suppliers. This works best when there is a clear feedback loop (e.g. in case of the stock market, it is the returns for the punter from her stock purchase). This is very difficult in case of charities - since you have little/no idea of how your charity performed (which is the fact that the market by-passed this area to begin with). In our case, we do not have a clear way of judging whether CRY was better than say, Asha or World Vision (or any of the other umpteen charities that focus on some area of child welfare).

b) A market place for charities would work if there is a clear way of evaluating multiple options (back to the stock market analogy - the stock-price and historical-returns are indicators for evaluation). In addition to CRY, the solution would have to be have all the 'competing' charities displaying their alternatives at the same time/place so that the confused residents could have had a go at it in a more rational way (something of a stock market for charities). Obviously, that again is not possible.

So what is the answer - as with every economic transaction, two major factors matter:
1. Approach each such alternative with a healthy dose of scepticism. Don't be afraid to say No to a charity if you think they do not fit your criteria.
2. Do enough background research on charities before you decide to give. One interesting resource to check out in this direction is www.givewell.net. Ultimately, there is no substitute to information/data driven decision making.
And so the question now is - does this take away the romantic element of charity? The impulsive, feel-good nature of giving spontaneously? Perhaps, but remember that two entire 'industries' have been built around tapping this very human emotion - and they are begging and charity.