The Economics of Charitable Giving....

Suppose that you wish to help someone who is not as well off as yourself. That should be easy, right? Just give them money. Wrong! As Tim Hartford argues (thanks to Marginal Revolution for the pointer), if we really want to make a difference, we need to think carefully about the incentives that our giving may create.

As a simple example of perverse incentives, suppose we give money to the first beggar that we see. By so doing, we increase the incentives to beg, which is an unproductive activity. In the margin, our giving may induce more people to forgo a productive job and instead take up begging. Society as a whole looses.

There are other less obvious costs as well. Pedestrians tend to follow similar paths, and beggars will concentrate in areas where pedestrian density is greatest. In Hong Kong's case, that would imply increased congestion around exits to the MTR, an externality borne by all of society.

To some degree, perverse incentives are an unavoidable cost of charity, but there are ways to minimize these negative effects. The first step is to try to ensure that any money we give is used to meet a short-term human need like food, rather than as an alternative source of income to a job. This requires some effort. Instead of giving money, give food. Or even better, give money to a charity that provides food to the very poor- hopefully in a more cost-effective and efficient manner than you can as an individual. Since the marginal utility of food consumption falls rapidly with increased consumption and beggars cannot easily on-sell donations of food, this ensures that hungry beggars have their most basic need met, while at the same time ensuring that they face little incentive to make a career out of begging.

Next, we should view charity as making an investment in the future welfare of the planet, and try to get the maximum long-run return on our investment. As the old proverb says, "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime." Giving food to beggars may be good, but giving him life skills is even better.

As an individual, there is little most of us can do to help the very poor to improve their ability to earn an income. But, as with food, there are many well-run charities that we can support that provide these services economically.

Charity may create perverse incentives, but by creatively targeting our charity, we may minimise these incentives and so maximise the benefits of our giving on society.