David R. Henderson  

Gifts in Kind vs. Gifts in Money

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Kling vs. Sumner, Continued... Murphy's Catch-Up Contradictio...

A standard thing we teach our students is that it's more efficient to give money to people than to give stuff. Here's a beautiful statement of the point by Alanna Shaikh, a global health professional. An excerpt:

Donating stuff instead of money is a serious problem in emergency relief. Only the people on the ground know what's actually necessary; those of us in the rest of the world can only guess. Some things, like summer clothes and expired medicines are going to be worthless in Haiti. Other stuff, like warm clothes and bottled water may be helpful to some people in some specific ways. Separating the useful from the useless takes manpower that can be doing more important work. It's far better to give money so that organizations can buy the things they know they need.

Her post has a great title: Nobody Wants Your Old Shoes.

Of course, the same principle applies to thinks like health care, education, and housing. Hmmm.

HT to Art Carden.


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CATEGORIES: Revealed Preference



COMMENTS (26 to date)
RL writes:

And yet the wife was not obviously pleased by the $20 on our anniversary...It was the first, or paper, anniversary, and the $20 was made of paper, so I thought it rather traditional...

David R. Henderson writes:

Good one, RL.

david writes:

With health care, education, and housing, it's not an emergency, and you can sit and figure out what's the best way to do things. If your civil service is incompetent then it won't take the opportunity to do so, but then you only have your voters to blame.

In the context of long-term aid, sending money instead of goods encourages the formation of middlemen barriers along the way to siphon much more of it. This is a particular problem in aid to stable-but-poor areas. Siphoning the top off ten thousand pairs of second-hand shoes is difficult - even selling it generates a paper trail. Taking a bit off a hundred thousand dollars is a lot easier. This was a lesson hard-learnt in South and Southeast Asia.

RL writes:

Wouldn't the best aid for Haitians at this point be open immigration to the US?

David R. Henderson writes:

I agree with RL's last point.
To david:
Suppose I offer you $1,000 or I offer to spend $1,000 toward an insurance policy that I design for you and that you have no say in designing. Which would you choose?
Best,
David

bbb writes:

>>Of course, the same principle applies to thinks like health care, education, and housing.

If there are important external effects from the choices people make in choosing their consumption patterns, there indeed might a difference with subsidizing these goods. The motivation to subsidize these goods and services may lie in avoiding the negative psychological externalities that the visibility of sick suffering people or the quite real externalities that uneducated people cause to their fellow members in society. James Buchanan has among others made this point.

If this were a prime motivation for the subsidization of these goods and services, the question "Which one would you choose?" from your comment might be irrelevant. The relevant question would then be "What do I as a donor of my tax-money choose?"

david writes:

If you were offering me alone $1000 or $1000 worth of insurance, I'd go with $1000. If you were offering me and every citizen of my country $1000 or $1000 worth of insurance (appropriately adjusted to suppress inflation/etc.), I'd support the latter.

So, what's the context here? ;)

MikeDC writes:

You know, I'm not sure the standard model of gifts in kind vs. money applies as well as we'd think in the case of a major disaster in what was already a subsistence economy.

What can a US dollar buy in Haiti right now? Who, exactly, is getting the dollars? Do NGOs have incentives to use dollars differently than in-kind gifts?

I don't know the answer to the first two questions, but third was rhetorical.

Marcus writes:

David,

Why? If we assume you're fairly typical then it would be reasonable to assume that most everyone else, like you, would rather have the $1000 too.

David R. Henderson writes:

david,
What Marcus said. Plus, if I understand you correctly, you think you can make better choices than me with $1,000 but you think I can make better choices for other people than they can make with $1,000. Or is there some other interpretation?
bbb, "A donor of my tax-money?" Taxes are not donations. They're coerced. As soon as they are taken, your control over "your" tax money falls to approximately zero.
Best,
David

N. writes:

Immediately after 9/11 I volunteered at a donations drop-off point in lower Manhattan. Cars packed to bursting with 'stuff' drove in from all over America to help with the effort.

What we needed was: shovels, pick-axes, masks, hard-hats, potable water.

What we recieved, generally, was: old clothes.

There were people who has literally driven through the night to reach NYC, to avail the the victims of their old clothes. By midday, absolutely all donation centers were jam-packed and I was given the order to start turning people away, so what little remaining space we did have could be used for supplies that were in demand.

They were furious and full of righteous indignation, and I can still see the face of one man in particular, contorted with rage, screaming at me that he hadn't driven from Tennessee to argue with some idiot who thought his family's old clothes weren't good enough for New Yorkers.

I certainly learned something about charity that day, but I'm still somewhat torn by the experience. It would have unquestionably been better for the effort if these folks had stayed home and sent the money spent on gas (not inconsiderable) to the Red Cross. There is no way doing so would have assuaged their consciences, however, which is a very real consideration. After all, I had volunteered out of a desire to 'help out' in some way, to do /something/. I was after the same kind of consolation they were.

I now think the correct course of action would be to quietly push the clothes into the Hudson, while making certain that nobody was turned away. This would have allowed donators to feel as though they had done some good, while those dropping off useful items would have a minimum amount of hindrance. I think that's really the best you can do.

Matt writes:

@ MikeDC

I don't believe that you're first question is the correct question to ask. As, for all practical purposes, there nothing to buy in Haiti right now. The purpose of aid dollars is to purchase aid materials outside of Haiti and transport them to the country. And in answer to your second question, ideally the organizations receiving such dollars should be the ones with the logistical capability to handle such an endeavor in the quantities needed.

Prakhar Goel writes:

Dear Dr. Henderson,

Surely you know that welfare isn't about helping people. It is about solidifying political power. If the government just gave transferable bonds to the sick and the needy, how will they convince these people to vote for the correct political party, now that the party is useless to them?

This isn't stupidity on the parts of politicians. It is a principle agent problem. The only workable solution is to change our currently dysfunctional system of government.

Les writes:

I do not agree that "... it's more efficient to give money to people than to give stuff." It is easy to find counter-examples.

For example, school vouchers limit parents to obtaining schooling for children, as opposed to using the subsidy for parents' desires rather than child education.

Another example: I don't give cash to beggars, who might well spend it on booze - I give a can of tuna instead.

David C writes:

The others I get but housing? I thought with refinancing the government was just getting people to stay in houses they themselves picked out which they couldn't afford. When did the government start telling people which houses to live in? I hadn't heard about this.

David R. Henderson writes:

Dear Prakhar Goel,
You make a good point. I'm not writing for them. I'm writing for people who care about the poor.
Dear Les,
Those are good counterexamples. They work as counterexamples, though, because you care about the beggars by your standards rather than the beggars' standards and because you don't trust parents.
Best,
David

David R. Henderson writes:

Dear David C,
It's been going on since LBJ set up HUD in the mid-1960s. Section 8 is dedicated to housing as is the so-called "public housing." I wasn't referring to refinancing.
Best,
David

david writes:

@ David R. Henderson

Oh, no. I do recognize two things:

- that even though I can spend $1000-on-myself better than you can, the difference is likely much smaller than $1000. Call this a faith in humanity.

- that if an entity can decide how to spend $1000 per person in an entire country ($1000 of real wealth, etc., to suppress monetary issues), it is quite capable of exercising market and political power with said wealth. You don't have to deny economies of scale and so on to see how this might be a net welfare improvement; think of some entrenched interest group you don't like to pick a fight with. Can that improve welfare by more than $1000 per person?

A tangential question was Caplan's Billion Dollar Bribe. That's $3 per American, for reference.

More broadly, in the case of (say) housing, the ability to call the shots over millions of people changes the question from "Hayekian information extraction" to "design your own society". Which does not free a well-intentioned planner from the problem of extracting information, but it does make the question different.

And, yes, I can think of cases where governments have made effective use of said power - you mentioned health care, education, and housing; Singapore manages all three to a degree unthinkable in the US and seems to have made the most of it. Maybe you could talk to Caplan about it. Sumner seems to like Singapore's healthcare, too.

As to why I might think you would spend $1000 per person on such philanthropy, see point #1.

Nick writes:

Les,

I hope you give them a can opener too.

Loof writes:

Viewing gifts in kind VS. gifts in money is shortsighted. How to qualify gifts in kind AND gifts in money is the problem. As such, david’s applied economics is more the norm; David’s academic teaching of a “standard thing” needs an absolute adjustment. The referenced article would be better titled: Nobody wants your old shoes; Everyone wants your old glasses—except, you see a lot of old shoes in the markets of Asia and many people in the outlying villages L frequents would appreciate any old shoes in kind—or old runners. Visited a school sports day in Burma once: the few who had old runners were most fortunate.

bbb writes:

Dear Mr. Henderson,

"Taxes are not donations. They're coerced. As soon as they are taken, your control over "your" tax money falls to approximately zero."

Actually, people can collectively vote on how much they want to be taxed, and what to spend the money on, and if they evaluate their tax burden to be too high, to reduce it.

The fact that some individuals will sometimes oppose the use of their money for some collective purposes does not mean that the majority of the people does (or would) not voluntarily give their money to achieve purposes which can only collectively be achieved - e.g., internalize consumption externalities of the poor.

That is what I wanted to highlight in my comment above: that subsidizing health care and education may actually be different from giving money in the case of foreign aid. The reason being the possible consumption externalities I referred to.

I grant you that the political process works imperfectly, so that the interests of the tax-payers are imperfectly represented, and that the spending-preferences of a majority are largely satisfied with rich people's tax money.
There surely is much room for institutional reform to improve the workings of collective choice to be more responsive to the common interests of the people, instead of the interests of special interest groups.

kailer writes:

Health Care is very much like gift giving. A good chunk of the reason I give gifts instead of cash is that I get utility from my friends thinking of me, which their much more apt to do if I give them a whole good instead of helping them pay for multiple goods.
It's the same with the government. They could just give poor people money to buy health care or whatever else they wanted, but then poor people wouldn't think, "hey this is the healthcare the government bought for me. That government is such a swell institution."

Les writes:

David:

You responded "Dear Les,
Those are good counterexamples. They work as counterexamples, though, because you care about the beggars by your standards rather than the beggars' standards and because you don't trust parents."

Your assumptions are incorrect.

I care for beggars by long-term rather than short-term standards, and I trust MOST but not ALL parents.

Jim writes:

Suppose I offer you $1,000 or I offer to spend $1,000 toward an insurance policy that I design for you and that you have no say in designing. Which would you choose?

David,

The devil is really in the details here. The answer to this simplified case is obvious, but none of the real world examples you mention resemble this case.

In the case of disaster relief the actual choice is between giving in kind donations with a market value of $1000 dollars discounted by the mismatch between the types of goods given versus the need, or $1000 cash minus x percent for administration, overhead, and/or outright corruption. All of these depend on the particular circumstances of each case. There is no a priori answer.

On the other hand, let's apply your insurance example to something like Obamacare and the situation is a bit clearer. Now the choice is whether the state seizes $1000 from a citizen and uses it to in return fund an insurance policy that's worth $1000 minus x percentage for administration, overhead, and outright corruption, or leave the citizen unmolested to spend her $1000 as she sees fit.

mikeDC writes:

@ Matt,
I think it's one of the right questions to ask because I don't think there's an ideal (as you put it) situation with regard to logistics and I don't know that there's a feasible solution to the problem.

I think short of the US military, there are very few sets of folks that can reliably get into the country and do useful work at this very moment. Attempting to do so might be very expensive and have very little net benefit.

In economic terms, my suspicion is that the supply curve for immediate, effective relief might be quite inelastic in the immediate (and determinative) short-run.

Sometimes the more effective solution might be to wait, but my suspicion (backed by the vast amount of evidence in this thread) is also that this runs contrary to our charitable impulses in the first place.

So at the end of the day, I do think we might be in a situation where cash benefits will be largely squandered, whereas some in-kind benefits will be initially useless but ultimately useful.

Dewaine writes:

Of course there are gifts which are not intended to be efficient; they are intended to show a particular thought or concern, and optimally to express a shared thought between the giver and receiver of a gift.

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