Incentives vs. Grants

I came across an interesting post this weekend from economist Robin Hanson (whose blog I've teased here once before) on the topic of charity. He writes (bolding mine, italics his),

I’ve overheard many folks lately discussing what sort of charity most deserves their money. They consider the plans of various charities, and try to analyze the chances that such plans will lead to good outcomes. Most folks I’ve heard have been favoring various intellectual charities, where the money goes mostly to pay intellectuals to develop and communicate ideas. And most of these folks also seem to spend lots of time consuming intellectual ideas. They read a lot, and have many opinions about what previous ideas were interesting and useful.

Such folks would do well to review the advantages of prizes over grants, and consider becoming charity angels. Let me explain.

Consider a donor who seeks to encourage or induce some sort of result in the world. With a grant, such a donor must decide ahead of time who seems to have a promising ability and approach. But with a prize, a donor need only decide after the fact who seems to have achieved a lot. Once potential awardees see a pattern of achievements being rewarded by prizes after the fact, they will gain an added incentive to achieve, an incentive roughly proportional to the prize amounts being offered. And the prize process avoids much of the added waste of grant proposals, review, search, etc. (Promising potential winners who are strapped for cash can obtain resources by selling their future prize rights in capital markets.)

Since it is much easier to evaluate what has worked than what will work, folks who read a lot of intellectual work and who are inclined to support future intellectual work via charity should consider making a habit of just giving money to those who have already accomplished something noteworthy.

Instead of "Incentives vs. Grants", I just as easily could have titled this post "Rewards vs. Gifts"--when deciding to give to charity, should we reward someone for achieving, or simply for trying? There are dozens if not hundreds of well-meaning charities that try very hard to achieve a result, but end up having little measurable impact. It's not that they don't do some good, nor am I trying to suggest that they should be dissolved. It's just that they could--and probably would--be better and more efficient if they were forced to strive to meet well-determined goals.

Sure, our social ills are "hard" to solve, but they are certainly achievable goals. If the prize is large enough, you'll be amazed what human beings (or groups of them) can achieve. For examples, I refer back to this post from November (or even this one from October), which enumerated some pertinent instances where properly-created incentives led to seriously beneficial outcomes.

To be sure, providing an incentive will not always lead to the desired outcome. If the incentives are not large enough, or they are simply designed improperly, we shouldn't expect to see any substantive improvement in the conditions we are targeting. But I would argue that our current system represents the epitome of a poor incentive structure--we give money to organizations somewhat indiscriminately on the promise that they will do good things, and they don't have to give a dime back to us if they fail.

Businesses wouldn't last long if they structured their deals in that manner, but for some reason we expect charities to thrive in that same type of scenario. In charity as in business, we need to create real accountability in order to see the results we desire. Without accountability, any success is purely coincidental.

[Overcoming Bias]