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How to choose a charity
MR reader Jeffrey Drucker writes:
I'll be graduating college in just a few weeks and entering the real world. That is I'll be a salaried employee making all budgetary decisions for myself. Aside from the necessary components of spending, saving, and repaying my college loans I'd like to set a portion of my earnings aside for charitable donation. I've always thought that charity was a crucial element of any caring libertarian's mindset. Now that I will be able to spend my own money, I wondered if you could provide any insight into the economic considerations of charity.
Obviously, the decision to donate is based on personal considerations and evaluations of the relative merit of different organizations. But economically is it more sensible to donate to a wide number of worthy causes or champion just one. Should I focus on issues closer to home or those who are in the most need the world over? How large a percentage of my income is it reasonable to donate, what issues should I consider (value of investment opportunities, lifetime consumption)?
Putting political and intellectual non-profits aside, here are some principles for purely charitable giving:
1. Published information on budget ratios devoted to programs and fundraising expenses is not reliable. Many charities manipulate the data.
2. Consider neglected but long-simmering problems; read my earlier analysis of whether you should focus on the crisis of the day.
3. Hardly anyone gives enough to charity and you won't either. Pick a cause or causes you will become addicted to. Tell others you won't back down from your cause, so that you will lose face if you do.
4. My preferred approach is pure cash transfers to rural Mexicans, vis-a-vis Western Union. You don't get the tax break but administrative expenses are very low. Think of Western Union as a for-profit charity.
5. In-kind aid sounds inefficient to the economist, but the commitment may make you happier. You are wasting most of your time anyway.
6. Don't give money to beggars, the explanation is here.
The comments are open for other suggestions. Analytical principles are especially welcome.
Posted by Tyler Cowen on December 1, 2005 at 07:46 AM in Education | Permalink
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Comments
0) Pick a target percentage of your income. Typical values range from 3-5%, with 5% levels typically coming from people in the lower quintiles (who are probably seniors, see the Statistical Abstract). The goal drives your giving (a Schelling point?), and knowing that you have a plan makes it easier to say no to unwanted solicitations.
1) Choose charities that reinforce rather than undermine property rights, e.g. Habitat for Humanity and The Nature Conservancy
Posted by: Eric H at Dec 1, 2005 8:02:31 AM
Oops, I forgot
2) Divide your target up among your chosen charities and give regularly. Like the "pay yourself first" principle in personal finance, it's easier to write monthly checks for $20 than one check for $240, and it avoids the reliance on crises. If one should arise, and you can afford it, by all means give, but the regular spending plan means that you won't suffer from guilt if you can't.
I also forgot that I charted the data from the Statistical Abstract here:
http://www.zianet.com/ehusman/weblog/2004/10/charitable-spending.html
Posted by: Eric H at Dec 1, 2005 8:32:46 AM
I believe it is a moot point attempting to assess efficiency in the non-profit market. One of the fundamental principles of that market is that donors neither require nor receive:
a) accountability in the classic sense (shareholders get no say in operational decision making, and often will have no idea where the money goes specifically at all.)
b) greater returns to investment between 2 different charities
Given that, I recommend an alternative set of criteria.
1) Give to organizations whose missions generate the greatest personal utility for you. Give to an organization that utilizes a model you like, champions a cause you are passionate about, or targets a population you have a special interest in.
2) Avoid earmarking your funds - earmarking hinders the ability of organizations to fund important causes over urgent or glamorous ones. If you trust an organization with your money, trust them the whole way.
3) I like to fund organizations that don't spam me with incredible amounts of literature. Junk mail and spam lower my personal utility from giving to charities.
Posted by: Dave U at Dec 1, 2005 8:44:11 AM
I believe it is a moot point attempting to assess efficiency in the non-profit market. One of the fundamental principles of that market is that donors neither require nor receive:
a) accountability in the classic sense (shareholders get no say in operational decision making, and often will have no idea where the money goes specifically at all.)
b) greater returns to investment between 2 different charities
Given that, I recommend an alternative set of criteria.
1) Give to organizations whose missions generate the greatest personal utility for you. Give to an organization that utilizes a model you like, champions a cause you are passionate about, or targets a population you have a special interest in.
2) Avoid earmarking your funds - earmarking hinders the ability of organizations to fund important causes over urgent or glamorous ones. If you trust an organization with your money, trust them the whole way.
3) I like to fund organizations that don't spam me with incredible amounts of literature. Junk mail and spam lower my personal utility from giving to charities.
Posted by: Dave U at Dec 1, 2005 8:44:45 AM
Don't give to beggars - good advice.
Earlier this week some blog with ads plastered all over it had the nerve
to beg for money. I didn't give any.
Posted by: Michael H. at Dec 1, 2005 9:20:15 AM
Do not give to charity. It creates a moral hazard whimsically papering over social needs that would better be supported by higher taxes and government solutions.
Posted by: theCoach at Dec 1, 2005 9:33:23 AM
Sorry to take advantage of a comment thread, but there are people who would love some followup to your debate with Max. A response to Kevin Drum would be a good start. Thanks.
Posted by: theCoach at Dec 1, 2005 9:36:39 AM
I would start with the place you are soon graduating from. No one pays the full cost of education in a college or university and investments here pay off to the greater society.
BUT, I would modify one of the earlier comments. Here restricted gifts may be appropriate. If you have had an excellent experience, give to the general fund. If you have been in a place of political correctness, give to the department or program that you trust.
Posted by: drtaxsacto at Dec 1, 2005 9:36:53 AM
A third property-rights charity to consider is the Heifer Project, http://www.heifer.org , which gives livestock to poor farming families around the world -- i.e. a direct infusion of the most important form of capital among the rural poor.
I love Habitat, but they have been criticized for their cost effectiveness and for mortgages which allegedly undermine the property rights/resale opportunities for homeowners, by giving Habitat rights to rebuy the houses cheaply if the homeowner wants to sell. I am not familiar with the details, but so far I continue to support Habitat.
The Nature Conservancy has been _heavily_ criticized for tax deals with their board members/major contributors. Check out the Washington Post series on them.
http://www.washingtonpost.com/wp-dyn/nation/specials/natureconservancy/
Form your own opinion from the stories, but the general allegation is that they acquire large undeveloped land parcels, allow rich people to build houses on them, and then put in deed covenants preventing other development (which give the rich people tax breaks.)
Personally, I prefer to give to the international church charities -- Episcopal Relief& Development for me, but Catholic Charities, Lutheran World Relief, and other groups for every religion and denomination are available. I like these b/c the churches already have an organization on the ground which (1) keeps additional overhead costs down -- instead of sending expensive American consultants to Kenya, you use local Kenyan priests to run things; (2) provides good information on small, local needs, such as the individual poor people Tyler gives to; (3) provides a supervision system with strong moral norms. Obviously, your mileage may vary here depending on your religious belief and/or trust.
Posted by: DK at Dec 1, 2005 9:39:42 AM
One thing I see quite frequently (via such things as collection cans at the 7-11) are ad hoc funds created to help a specific person, for exampl a local child with a serious illness. It should be safe to assume that most of these funds have minimal administrative expenses. A contribution to one of these is probably an excellent way of seeing that your money goes right to the recipient, though you may not get a tax break if the fund isn't registered.
Posted by: Peter at Dec 1, 2005 9:53:12 AM
Given that for many people part of charity is to make one feel better about oneself, I'd recommend giving to one charity each year instead of ten. Otherwise it's likely that at least one of these charities will share your information with other organizations and you'll be annoyed every day from the dozens of solicitations you'll be getting each month.
I also second the recommendation for the Heifer Project. One of the best things about them is that when you give money to them you know how your money's going to be spent.
Posted by: Hei Lun Chan at Dec 1, 2005 10:18:15 AM
Some of the most effective charities I've seen are Oxfam and Unicef. Even $10 could end up saving someones life.
Peter Singer has an excellent essay on the moralities of charitable giving, titled "Famine, Affluence, and Morality". http://www.utilitarian.net/singer/by/1972----.htm
Posted by: Macneil at Dec 1, 2005 10:23:36 AM
There's a case out there - and two minutes of google research failed to reveal it to me - that one should give to one charity only. Something about economies of scale? I dunno, but single charity giving does limit the expressive, self-regarding upside of donating smaller sums to a variety of causes one likes.
Posted by: David Zaring at Dec 1, 2005 11:19:57 AM
Here is the "one charity" argument.
http://www.slate.com/id/2034/
Posted by: David J. Balan at Dec 1, 2005 11:27:32 AM
DK
I do know about Habitat and their issues with the "restrictive covenants"
Basically, Habitat homes are rent-to-own. They are a great deal, but the
"lease" puts a lot of conditions on the homes that make them much less valuable to homeowners. For example, you cannot rent rooms out.
This last point brings up the very most objectionable thing about Habitat: they beg local goverments to waive property tax. The reason they claim this need is because their homeowners are responsible for the increases in tax due to the increases in appraised value (something very relavent around the country recently). They claim that their homeowners are unable to pay the extra tax because they are not able to rent rent rooms or get a home equity loan or otherwise profit from the increase in their home value (until the end of their 20 year covenant). But this condition was created entirely by Habitat! It is ridiculous for Habitat to beg for charity for their homeowners when they created the problem in the first place.
Btw, the previous comment was intended as a joke, but may not have come off that way.
Posted by: Michael H. at Dec 1, 2005 11:36:00 AM
One rule I try to follow: give generously whenever someone is offering to match my donations.
As an example, my employer offered matching for donations both for this year's hurricane victims, and for last years tsunami victims. I figure: even if the organization I give to is less efficient than some other organization, that's almost certain to be more than made up by the 2X multiplier due to my employer's match.
Posted by: Alex R at Dec 1, 2005 11:58:37 AM
Expected utility dictates a single charity until you believe that your chosen charity is adequately funded. Economically we should use each dollar to buy the good which provides the greatest marginal utility. In general in life we buy a varied basket of goods because the marginal utility of a given good diminishes as consumption of that good increases. With our first dollar we buy good A (food prehaps, or possibly a drug), as the utility of the first unit of A is greatest, then, after consuming 3 or 4 units of A, its marginal utility has fallen beneath that of the first unit of B (some clothing? fuel?) you spend your next dollar to buy a unit of B. For charitable giving, given typical donors and much larger typical charities the marginal utility of a donation is strictly linear with size (increasing slightly at first due to the initial disutility of getting on a mailing list unless you like being on mailing lists more than you like your preferred charity saving the money it costs them to send mail out, a feature of your potential character that you would loose utility by recognizing if it is true of you now that I have pointed it out ). The charity will do as much good with your second $1000 as with your first. It follows that a rational donor will always a) donate exclusively to charities that he/she can fund to an extent sufficient to reduce their marginal utility for a dollar or b) donate to only a single charity. It also follows that a rational donor will, before tax and social considerations, and ignoring response to disasters, never donate anything until their other net consumption (consumption on goods which do not raise their economic productivity) exceeds a threshold, and subsequently donate all of their surplus earnings. However, their gross consumption (typically simple called consumption) may continue to rise. For instance, they may invest an increasing amount in capital goods which increase their earnings potential by raising their status, self-esteem, productivity, or time efficiency even after passing the donation threshold, because as their income increases the utility of such goods may rise above that of money donated to a charity due to the goods being complements of income. Also, a rational entity with only partial control of their utility function will invest in retaining their current utility function, so if they sense that donating another dollar to charity X will cause them resentment which will undermine their desire to donate to charity X in the future they may refrain.
Posted by: michael vassar at Dec 1, 2005 12:05:57 PM
Michael Vassar,
That's a good analysis, but I'd like to add that we ought to be specific about whose utility we mean. The utility to the charity may be strictly linear, but the donor might receive diminishing marginal utility (and possibly, as you point out, receive negative marginal utility). One might like giving to a specific charity, in general, because one likes to be the sort of person who gives to that charity, but not receive much additional utility for giving additional money. In this case, giving to multiple charities might make a great deal of sense (though pointing this out might also reduce one's own utility).
Also, a previous poster advises against earmarking funds, because doing so reduces the charity's flexibility. I disagree. Money is fungible, so unless you are giving more money to a specific project than the charity would have otherwise spent given complete flexibility, you do not affect their behavior or actual flexibility. Since you may receive additional (if irrational) utility from the perception of control over your funds, earmarking might make a great deal of sense. This is why charities offer earmarking in the first place: offering the perception of control increases a donor's utility, and so is likely to increase total donations.
Posted by: Ryan Peterson at Dec 1, 2005 12:30:58 PM
The Motley Fool generally has a good list of capitalist-friendly charities each year with "Foolanthropy".
http://www.fool.com/foolanthropy/2005/foolanthropy2005.htm
Another Heifer mention! And on a personal note, I volunteed for them once and milked a goat :)
Posted by: Joel at Dec 1, 2005 12:31:29 PM
Ryan Peterson comments that the fungibility of money means that earmarking doesn't decrease the utility of your donations, so you might as well increase your personal utility by choosing something that meets your fancy. But this requires that the charity have enough non-earmarked funds to shift to their preferred uses. I derive my additional (and not entirely irrational) utility by choosing to provide such funds... :-) (Similarly, other people or organizations may choose to provide "matching" funds so that people like me can earn extra utility by having their donations matched. Whether my extra utility is rational or not depends on what those who donate the matching funds would have done with the money if I hadn't donated...)
Posted by: Alex R at Dec 1, 2005 12:58:31 PM
We should distinguish between _charity_ and (also voluntary) _tipping_. IMHO, giving to your college or your favorite blog should not be in the same category as giving to starving 3rd world children. Instead, it is a tip you give (a) to signify your gratitude/received utility for service and (b) to show you are a good member of a community and not a free-rider. Thus, I do not see giving to your college as fulfilling your moral obligation to help the poor, only as fulfilling a different obligation.
I had some friends at my (richly endowed ivy) undergrad college who declared that they would never donate to the school, b/c their endowment was already sufficient for all reasonable needs, while starving children in the 3rd world have real needs. Their reasoning was wrong b/c it ignored the tipping/free-rider aspects of the problem. But I still have sympathy for their viewpoint, b/c the school in question really does have enough money to make tuition free forever if they so chose.
p.s. this is largely a response to Michael H's joke and the college-giving comment above, but yes, I realize it is a joke, and I laughed.
Posted by: DK at Dec 1, 2005 1:46:59 PM
Another reason to give primarily to one charity, year after year is the cumulative effect. Charities must constantly make choices as to which supporters' view should have the greatest impact. Organizations note not only how much a person has given but how a long a person has been giving. Over time you will have much more impact on a organization, particularly a smaller one (like, say, your local Planned Parenthood affiliate) if you have a history of steady donation.
Posted by: Tylerh at Dec 1, 2005 2:27:26 PM
By the way, a few charities combine small size and high expected utility to such a degree that they break down any issues of altruism. Donations to the Singularity Institute www.singinst.org , and the Methusaleh Prize http://www.mprize.org/ constitute rational investments based on expected payoff and lack of correlation to other investment payoffs. If you care about the well-being of other people, that's simply a multiplier effect that makes the expected utility of giving to them even higher. The only reason not to donate is the variance of expected returns and the possibility that their actual expected value is lower than it appears because of time discounting or subjective time discounting. Do you discount the utility of your 100 year distant future self by 1,000,100 years if he has been living at a 2000-fold accelerated rate for 50 of those years?
Posted by: michael vassar at Dec 1, 2005 2:52:47 PM
DK, if you simple treat charity and tipping as "goods" like any other then it seems that your analysis simply adds a third category of "good", one with the normal diminishing marginal returns to utility, the good of having bought off your conscience/lubricating the social machine. It is possible that this "good" has greater or lesser utility in your utility function than the utility of the potential recipients of charity or of tipping. Either way my analysis still holds. This new good has extreme diminishing marginal returns to utility. People who consume none of it, or even not very much of it, are several steps more dangerous than sociopaths. Not stealing what you want whenever you could get away with stealing it is, from an economic perspective a form of consumption. OTOH, calculating whether you can get away with stealing any particular thing is an investment, and having a heuristic against making that investment is not a form of consumption but rather an investment strategy.
Posted by: michael vassar at Dec 1, 2005 3:05:10 PM
Michael Vassar, in your last post, I'm not I follow you. do you mean that what I call "tipping" is "This new good", that not tipping is effectively stealing, and that therefore not tipping is equivalent to consumption (of some form of social capital?) I think I agree with you, but I am not entirely sure.
My point really is just that to me, charity and "tipping" your alma mater are not substitutable goods. If I send Princeton a check, I might gain a good feeling, but I will never feel that it gets me off the hook for sending a check to feed starving children. This may just be my own personal preference, though, and not applicable to many others.
Posted by: DK at Dec 1, 2005 3:55:44 PM
