Two problems with charity:

 

1) You usually don't know what your donation achieves. At best, you might know what your money is spent on. You don't know how effective this is at producing the outcomes you care about. Even Givewell, who seem to me to have done more careful work on cost-effectiveness than anyone else, regard their cost-effectiveness estimates as very rough and no more than an indicative starting point for evaluating charities.

 

2) Charities have low or no financial incentives to be as effective as they can, not least because usually no-one knows how effective they are.

 

 

Potential solution:

 

Instead of donating to charities, pay them for results achieved.

 

Ideally, you would pay for the final outcomes which you care about, eg paying a certain amount per unit reduction in child mortality, reduced disease prevalence, improved test scores, etc. If this is too difficult, then you could pay for intermediate results, eg number of children vaccinated, number of people protected by bednets, etc. Results could be measured against a control group, some baseline, outcomes in parts of the country where the charity doesn't operate etc. (Comparison with a well-constructed control group would probably be best in most cases).

 

This isn't really something that an individual donor can do, since it relies on accurate, independent measurement of results and will be most effective when charities know that their funding depends on the results they achieve. To work best, it would have to happen in a co-ordinated way and at a large enough scale that proper measurement is affordable.

 

 

Advantages:

 

1) You only pay if a charity is effective at doing what you want it to do. You have less need to try to understand what a charity does; you can offer the money for the results and leave it to them to find how to produce them.

 

2) Charities will have financial incentives to be as effective as possible, including finding out how effective they already are and what they could do to be more effective.

 

3) Effective charities will get more money and be able to expand, ineffective charities will get less money and may have to close down.

 

4) Lots of information would be produced about what is and is not effective, which could help donors, aid agencies, charities etc make better decisions in future, whether or not they are paying / being paid for results.

 

 

Disadvantages relative to the current system of donating:

 

1) Measuring the results costs money; it might be better just to donate this money.

 

2) It might be possible to manipulate or falsify the results.

 

3) Where you cannot measure what you really care about (eg the long-term improvement in someone's life from their receiving education), focusing on intermediate results might make a charity less effective (eg teaching to the test, leading to less learning of things that will help later).

 

4) Charities may be able to produce better results in ways that produce negative, unmeasured side-effects. They may be more likely to do this when they have financial incentives to improve measured results.

 

 

Discussion of disadvantages

 

1) As well as potentially improving incentives, measurement could create very valuable information, especially since the evidence base for most charitable activity is very weak. It is likely to be money well spent.

 

2) Obtaining accurate results is a methodological issue, with technical solutions, though cost is a constraint. Falsification is certainly a danger. On the other hand, charities found to be falsifying results would face huge reputational costs; they would have strong incentives not to try. Also, charities with integrity might be unlikely to try, whilst the charities that would be willing to try might well be those that are already misspending money donated to them in the ordinary way; with an attempt at measurement, there is at least a chance of exposing this.

 

3) Targeting measures which become progressively worse guides to the actual good being done is a danger. Choosing a good measure – one which is hard to achieve without achieving the outcomes you ultimately care about – could make this a smaller problem. Even so, whenever the ultimate outcome isn't targeted directly, there is likely to be some diversion of resources from what a charity thinks does the most good, to what it thinks will improve measured results. However, this may be a gain, not a loss, if activities which improve measured results in fact do more good than the things which the charity believes are effective; and, if it is a loss, it has to be weighed against the gains from improved transparency, feedback etc.

 

As a separate issue, when the ultimate outcome cannot be targeted directly, a theory of why the intermediate targets are effective ways of achieving that outcome is needed, but this is no less true of charitable projects now. Also, there may be no measure with a close enough relation to a charity's ultimate goal that can usefully be measured; for such charities, paying them for results will not be appropriate.

 

4) If a charity's activities do more harm than good, then donations and payments for results would both be bad. Payment for results might be particularly bad if it leads to more money going to charities that do more net harm, or changes how charities function such that the net good they do goes down, because they pursue results in more harmful ways. Weighing up how big a problem this is would require some understanding of how the charities involved function (so, in fact, it's not quite so simple as 'offer money for results and leave it to them to find how to produce them'). The seriousness of the problem could be very different for different areas, regions or organisations; in any case, I think it's worth bearing in mind.

 

*****

 

Bottom line for me: the advantages seem to outweigh the disadvantages, and I would be more likely to give to charity if I could do it this way. At the very least, I would like to see it tried.

 

(This approach is actually beginning to be taken, though only in a tiny minority of projects, and not in ways to which an individual donor can contribute, as far as I can see – subject for another post, perhaps.)

 

Comments?

 

I've been doing some thinking about charity vs investment as alternative ways of doing good (leaving open for now what that means). One question I'm wondering about is, in what circumstances does your choice of what to invest in have any welfare consequences at all (beyond differences in your own future wealth). I'm not sure about the answer and so, if any of you have comments or ideas, please put them down.

 

There is an argument that ethical investment is largely or entirely pointless, at least as a way of affecting asset prices and therefore making it easier for ethically acceptable companies to raise finance, giving owners/managers incentives to do things to make their companies ethically acceptable, etc. The argument against the effectiveness of ethical investment is that other investors who care only about financial returns will counteract any price change that ethical investors achieve – they will, eg, sell shares whose prices move higher than justified by future financial returns, and buy shares whose prices move lower because ethical investors sell or stay away from them.

 

I think that, though there is a great deal of truth in this, there are exceptions. They include cases where investors can provide money directly to companies; where investors can make asset prices depend on something other than financial returns; and where they can influence expected future financial returns.

 

(1) When you can lend directly to a company, through a loan or when it is raising money by issuing shares or bonds, then you can more or less directly influence the price at which it can raise money.

 

(2) If there are enough ethical investors, they could end up influencing prices by making some prices depend on something other than expected financial returns. How much money would have to be invested ethically before this happens would depend on how it is invested and the market capitalization of ethically acceptable and unacceptable companies.

 

If ethical investors just avoid investing in some companies (negative screening), then, so long as non-ethical investors have enough capital to buy the shares, bonds etc. of those companies, and they value them at the level implied by future payments (dividends, interest etc), I don't think the ethical investors will make any difference at all. If prices of the companies that are unacceptable to ethical investors become low relative to companies that are acceptable, non-ethical investors will just move money from acceptable to unacceptable companies. If ethical investors instead invest only in the company or companies they think do the most good (and, for the sake of argument, they all agree what these are), then, if they have enough money to buy the entire stock of that company, they could push the price to more or less whatever level they want. But if they don't have enough money to do that, I don't think they'll make a difference, since, once they've invested all their money in those companies, there will always be non-ethical investors left wanting to sell (if prices are higher than are justified by financial returns), and the only people left to buy will be other non-ethical investors, so the price at which assets will trade will be the financially-justified one.

 

(3) Ethical investors might be able to influence prices by giving other investors financial incentives to buy or hold ethically-acceptable companies. Perhaps, if it is known that some people are willing to purchase certain assets at higher prices than is financially justified, then other investors will also be willing to hold those assets at somewhat higher prices in the expectation of selling them at an even better level (a version of the 'greater fool' approach – buying an asset that is already overvalued in the expectation that a greater fool will come along to buy it from you at a higher price).

 

This is more complicated to think through and I'm not sure what the result is. There is an academic literature on asset price bubbles which outlines the ways that prices can deviate from fundamental values, potentially indefinitely, but I don't yet have a good handle on it. In some conditions, it seems plausible to me that the existence of people willing to pay higher prices than are justified by fundamentals will make prices higher than they would otherwise have been. I am not sure about how large this effect would be, how long you could expect it to last for, how far it depends on other investors knowing about the intentions of ethical investors and how far the amount of money being invested ethically would have to increase over time so that there are continually new buyers willing to pay higher prices.

 

*****

 

My tentative conclusion is that it is likely that ethical investment can have an influence on prices, but it is probably quite small. Furthermore, it is uncertain what positive effects would follow from increasing the prices of certain companies. It might make it easier for these or other similar companies to raise money in future, but the good done by this would depend on how much more money they raise and what they use this money for. It could also create incentives for owners to make their companies acceptable to ethical investors, but only where the gains in asset prices from doing this outweigh any reductions in profits.

 

It might be possible to have some rough rules of thumb on positive ways to invest – eg invest money in emerging markets, if you believe that higher asset prices there could support economic growth and therefore higher welfare (just an example, not necessarily correct). If investment decisions on non-financial grounds do have an effect, then you will have done some good, and if not, then at least it will be no worse than investing in anything else, as you'll be investing at the financially justified price. On the other hand, perhaps the fees charged by investment managers, or transaction costs, will outweigh whatever good is done by making these investments.

 

In any case, it seems unlikely that the welfare consequences of investing in any particular asset in the secondary market are much different from investing in some other asset. If so, it seems a lot more important to explore the welfare consequences of particular primary market investments and donations, where the variance would be much higher. It would be good to have an estimate of the welfare consequences of a random investment into a secondary market investment, for comparison with the alternatives and to factor in to decisions about, for example, whether to save money now in order to donate it later.

 

I'd be very glad if anyone has any criticisms or something to add.