Market Design Meets Effective Altruism

post by Marshall (mpt7) · 2022-04-19T21:39:11.750Z · EA · GW · 6 comments

Contents

  Market Design Meets Effective Altruism
  Summary
  Well-Designed Markets
  A Search Problem: How Donors Navigate the Current Market
  Case Study: The GiveWell Marketplace
    Benefits for Donors
    Benefits for Nonprofits
  Extending the GiveWell Model
  Gaps and Predictions
None
6 comments

Disclaimer: This is adapted from a post on my blog, Empiricism. I’m not an economist and I'm new to EA, so this may overlook prior work that applies market design theory to philanthropy. Comments, suggestions, references, etc. would be very welcome!

Market Design Meets Effective Altruism

There are over 1.5 million nonprofit organizations in the United States alone. Faced with so many choices, how do donors find the “right” nonprofit to support? Might there be better and more efficient ways for donors to identify organizations that are doing great work on causes that they care about? Market design theory provides some insights into how the philanthropy donation market can be improved, and, in particular, how the EA community could shape philanthropy markets to steer more money to the most effective causes.

Summary

This is a long-ish post, so here are the take-home messages:

Here’s an analogy that may be helpful: in the for-profit space, VCs are looking for a liquidity event or an exit to realize return on their investment. An IPO is one such event in which a business goes public and becomes accessible to retail investors. Achieving the highly effective label and being listed by GiveWell is the nonprofit equivalent of an IPO. 

Well-Designed Markets

The Nobel laureate economist Alvin Roth identifies three key features of properly-functioning markets:

Judged by these features, the overall philanthropy market looks to be thick, not particularly safe, and very congested

A Search Problem: How Donors Navigate the Current Market

Not all donors use the same approach to choose the organizations they support. That said, research and lived experience reveal certain patterns. Donors:

These seem like reasonable strategies to guide donation choices and many donors are perfectly happy with the organizations they support. However, we can’t conclude that the market is efficient just because some donors are satisfied. The success of organizations like Bridgespan, Charity Navigator, and GiveWell (all of which help donors navigate a low-safety market) suggests that there is room for improvement.

Case Study: The GiveWell Marketplace

GiveWell is a small marketplace that has very different features from the broader philanthropy market. The GiveWell team rigorously evaluates charities to determine how much good they can do with each additional dollar they receive. GiveWell only recommends a handful of nonprofits that are highly effective. 

Let’s look at GiveWell in terms of market design features:

Benefits for Donors

It used to be the case that only the biggest philanthropists (such as the Gates Foundation) had the resources to evaluate nonprofits and determine where to invest to maximize impact. Now that GiveWell exists, even small donors can invest confidently in highly effective charities. By providing market access to many small donors, this frees up large donors to support promising nonprofits that haven’t yet met GiveWell’s high standards. By increasing safety and drastically cutting congestion, GiveWell brings more market-like dynamics into a small segment of the philanthropy market. 

The IPO analogy is useful here: VCs have the resources to evaluate small private companies and make high-risk investments. A small fraction of VC-backed startups eventually IPO, at which point retail investors can buy in. In the same sense, venture philanthropists can make many high-risk investments. Only a handful of these investments eventually achieve the highly effective label and become a preferred choice for “retail donors.”

Benefits for Nonprofits

It’s well established that many nonprofits struggle to get funding to support their overhead and operations. To keep the lights on, they are constantly fundraising for the next new initiative. GiveWell breaks this vicious cycle: most of the GiveWell charities focus on executing just one program extremely well. As a result, GiveWell charities behave a bit more like for-profit enterprises: they make a product (lives saved or improved), and additional donations just go toward making more of that product. 

This approach is not tractable for most nonprofits. To return to the IPO analogy, most businesses aren’t listed on public markets and never will be. IPOs only make sense for organizations with scalable business models, such as direct-to-consumer tech companies. Aside from Wikipedia, there don’t seem to be many highly scaled tech nonprofits that focus on doing just one thing extremely well. It’s interesting to imagine a future in which tech nonprofits have enough funding to achieve economies of scale comparable to what we see in for-profit tech.

Extending the GiveWell Model

GiveWell provides donors with a limited set of choices and causes: it’s not a particularly thick marketplace. If donors had more highly effective nonprofits to choose from, they’d be more likely to find and donate to organizations that match their cause preferences. This suggests a different strategy for nonprofit growth: funders can seek out projects that have high potential to become recommended by GiveWell but need additional evidence (and programmatic improvements) to make the cut. Even if many of these projects fail, the few that succeed in being listed by GiveWell will have forged a new pathway to sustainability. Charity Entrepreneurship and the GiveWell incubation grants program both look to have this type of market shaping strategy.

Gaps and Predictions

The central premise of this piece is that the philanthropy donation market is rather inefficient (mostly by virtue of its congestion and low safety) and therefore there is significant room for improvement. This premise is disputed and it’s difficult to find robust academic research on the subject. However we can make two testable predictions that would indicate whether this premise is true:

  1. Some people donate less than they would like to because the market is inefficient. Qualitative research on why people do not donate might provide some evidence for this prediction.
  2. When they find efficient marketplaces within the broader market, donors give more. Quantitative research (for example, looking at the percentage of income given before and after donors start to use GiveWell) could provide evidence that this is happening.

In other words, improving efficiency in the philanthropy market isn’t a zero-sum game. A better market could catalyze more donations and broader participation without undercutting nonprofits who are doing well in the current system.

6 comments

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comment by NunoSempere · 2022-04-29T23:28:49.249Z · EA(p) · GW(p)

I thought this was excellent. Do you have any thoughts on further ways to "extend the GiveWell model"? For instance, GiveWell could pay organizations which took a risk incubating or investing in charities which have now reached top or standout status?

Replies from: mpt7, akrolsmir
comment by Marshall (mpt7) · 2022-05-05T13:25:06.732Z · EA(p) · GW(p)

Thanks for reading and for the support! I like suggestion of a prize, which could encourage some risk-taking but also orient investment towards an objectively defined goal. Another way to extend the model would be for more and more venture philanthropists to explicitly adopt this strategy of funding projects that push towards GiveWell listing, recognizing that this is their opportunity to "exit" (IE - move on to funding other promising projects).

comment by Austin (akrolsmir) · 2022-05-01T19:09:00.705Z · EA(p) · GW(p)

Yup, I think that should be possible. Here's a (very wip) writeup of how this could work: https://manifoldmarkets.notion.site/Charity-Equity-2bc1c7a411b9460b9b7a5707f3667db8

Replies from: mpt7
comment by Marshall (mpt7) · 2022-05-05T13:25:31.782Z · EA(p) · GW(p)

Thanks for the link! I look forward to reading up on it.

comment by Denis Drescher (Telofy) · 2022-04-22T03:37:37.227Z · EA(p) · GW(p)

Thanks for that nice write-up and introduction to the model! Dony told me about your post. Not sure if you’ve met at EAG or whether he just saw it on the Forum.

We’re working on something that we’ve termed “impact markets [EA · GW],” which, we hope, will alleviate the congestion problem. It’ll also have an influence on safety depending on who you are on the market. Maybe you want to join our Discord or our next community call! :-D

Replies from: mpt7
comment by Marshall (mpt7) · 2022-04-22T10:50:37.070Z · EA(p) · GW(p)

Thanks for the support! Eager to learn more and will read your post on impact markets  :)