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.
The Nobel laureate economist Alvin Roth identifies three key features of properly-functioning markets:
- Thickness: the market needs enough buyers (donors) and sellers (nonprofits) that they can search for matches that work for both parties.
- Safety: both buyers and sellers need to feel confident enough to share relevant and accurate information related to the transaction. In the case of philanthropy, donors are particularly interested in how their contributions are being used and what impact their donations have.
- Lack of congestion: when markets are thick, it can take a lot of time and effort for buyers and sellers to find each other and evaluate each other in order to transact. Congestion makes markets slow and inefficient.
Judged by these features, the overall philanthropy market looks to be thick, not particularly safe, and very congested.
- Thickness: Donors have a plethora of different organizations to choose from.
- Safety: In most cases, it’s impossible for donors to know exactly how their funds are used and what impact those funds have.
- Congestion: Due to high thickness and low safety, donors need to spend a lot of time finding worthy causes, while many nonprofits spend heavily on development in order to bring in donations.
A Search Problem: How Donors Navigate the Current Market
There is no unified method that all donors use to choose the organizations they support. That said, research and lived experience suggest certain patterns that we follow when we give. Donors:
- Narrow their search by focusing on cause areas that they prefer. Personal and demographic traits (such as empathy, gender, age, and income level) influence donors’ cause preferences.
- Prioritize organizations to which they are personally connected. Knowing someone in the organization and volunteering for the organization are both associated with the choice to give.
- Decide to give in order to conform with group norms. Giving is more likely when friends, community members, and family are also involved in the cause.
These seem like perfectly reasonable and defensible 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. Through a complex methodology, “good” is estimated in terms of lives improved and saved by the charities’ work. GiveWell only recommends a handful of nonprofits that are highly effective.
Let’s look at GiveWell in terms of market design features:
- Safety is prioritized, with donors knowing exactly how their money is used and what impact it has.
- Congestion is minimized. Donors have a few “highly effective” options to choose from. Because GiveWell funnels donors directly to its recommended charities, those nonprofits don’t have to spend a lot of money on fundraising.
- Thickness is not prioritized. In fact the marketplace is quite thin. There aren’t many GiveWell-recommended charities, which means donors interested in other causes still have to search the broader philanthropy market for charities that fit their preferences.
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 for evidence. By increasing safety and drastically cutting congestion, GiveWell brings more market-like dynamics into a small segment of the philanthropy market.
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 shatters this vicious cycle: most of the GiveWell charities focus on executing just one program extremely well. GiveWell funding isn’t earmarked because everything the organization does (including “overhead” or “administration”) focuses on that one program. 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.
Extending the GiveWell Model
Broadening Donors’ Choices
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 new 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.
Expanding the Cause Space
As mentioned previously, we humans have a wide range of preferences for the causes we want to support. Donors who want to maximize their impact but aren’t interested in international health and well-being causes still have to brave the broader philanthropy market to figure out where to give their money. There is no “GiveWell for the environment” or “GiveWell for the arts,” but it’s interesting to imagine what that might look like. While such marketplaces probably would not use the same impact metrics, they could still help donors who are committed to particular cause areas make more evidence-based decisions about where to invest their money.
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 remarkably difficult to find robust academic research on the subject. However, if the premise is true, we can make two testable predictions:
- 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.
- 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.
Note: In researching this piece, I searched extensively for analyses of the philanthropy market that incorporate market design theory, but I wasn’t able to find much. Please email me – firstname.lastname@example.org – if you have comments, ideas, or references to share!