The Charity Confusopoly

Charities don’t operate in a for-profit marketplace. However, individuals often engage in something that looks like comparison shopping when deciding which charity or charities to contribute to.

To attract donors, charities often engage in behaviors similar to those seen in profit-seeking confusopolies.

I spent about two-and-a-half years working for the charity evaluator GiveWell, so I have some experience with the charity world.

It’s easy to read this article as a series of complaints about charities behaving unethically or dishonesty. I want to be clear that charities engage in these practices because they’re effective for attracting donations.

We’re in a bad equilibrium where individuals are easily misled and charities may struggle to carry out their missions if they don’t engage in any of the standard, misleading practices. Rather than blaming individuals or charities, I think the best way forward involves informing people about these practices so that we can move towards a better equilibrium—one where charities have an incentive to be open and honest.

Misleading statements from charities

Donor illusions

You’ve probably seen charities’ advertisements soliciting donations to directly sponsor a specific child, purchase a chicken, or build a well for a set price. It’s common for these contributions to end up in a pool of general funding instead of being dedicated to a particular purpose. Holden Karnofsky has coined these “donor illusions.”

Bogus donation matching

Matched donations often (not always) work the same way. If a large donor intends to make a contribution, it’s an opportunity for a charity to run a matching campaign. If the donor wants to donate $100,000, a charity can run a matching campaign where typical donors will have their donations matched up until $100,000 of matching has taken place.

Charities may pitch regular donors with: “Today you can double the impact of your donation!” If a large donor would have given even without the matching campaign, the pitch is misleading. Despite that, matching campaigns appear to bring in more funds.

Misleading statements about impact

Charities often make statements about the impact donations will have that are totally disconnected from reality. There might only be a handful of people in the world who’ve worked as intensely as I have to model and compare the cost-effectiveness of direct-delivery, charitable interventions. Many of the statements about cost-effectiveness that I run into in charities’ advertisements make my blood boil. It’s common to see major costs go ignored and incredibly selective interpretation of academic research.

Stupid overhead ratios

Charities and charity evaluators sometimes emphasize overhead ratios that compare program expenses to fundraising and administrative expenses. The implicit idea here is that overhead is undesirable and should be minimized. It’s pretty silly.

The same sort of logic would come off as obviously silly in other domains. I wouldn’t feel better about buying a television if I found out that almost all of the TV’s costs went into the component parts and that almost no money went into marketing, design, quality control, or assembly.

Part of the reason overhead ratios have become so prominent is that they’re easy to calculate. Most charities in the U.S. have to file a Form 990 with the IRS each year. The forms are made public, and the financial information needed to calculate overhead ratios is reported on the forms.

Really stupid overhead ratios

Sometimes charities will find ways to make claims like:
“All public donations go directly to the cause. None of your donation will be spent on overhead!”

This often works like the matching scenario I described earlier.

If a charity has funding from one source (e.g., a large donor that understands the importance of overhead), it may be able to say the funding from that source covers all the overhead costs and that 100% of contributions from small donors go to program costs. It’s just bookkeeping gymnastics.

Holden Karnofsky has a blog post about this phenomenon. I agree with his conclusion:

The ‘0% overhead’ claim is promoting the wrong metric (low overhead) and offering a false way to accomplish it.

Ambiguous motivations for charitable giving

I expect that some of the reasons the charity sector is screwed up are related to the lack of clarity people have about their reasons for being charitable. A perfectly-altruistic person might search for the charity that could do the most good with additional funding. But real people have selfish motives.

Publicly giving to charities can raise one’s social status. We have lots of reasons to support causes our friends care about. Helping people we have emotional connections with feels good. People may deceive themselves into believing that their motivations are more altruistic than they really are.

This is explored in some detail in a chapter of Kevin Simler and Robin Hanson’s The Elephant in the Brain.[1] I strongly recommend the full book. Here are two excerpts that get at some of the core ideas:

In light of all this evidence, the conclusion is pretty clear. We may get psychological rewards for anonymous donations, but for most people the ‘warm fuzzies’ just aren’t enough. We also want to be seen as charitable.
If we, as a society, want more and better charity, we need to figure out how to make it more rewarding for individual donors…one approach is to do a better job marketing the most effective charities. Given that donors use charities as ways to signal wealth, prosocial orientation, and compassion, anything that improves their value as a signal will encourage more donations.

Footnotes

  1. The charity chapter is the twelfth chapter in the book.