A few months ago I discovered, via Professor Chris Blattman’s blog, that the Red Cross diverted funds for news exposure while they were supposed to be helping victims of Hurricane Katrina. If this is true, the Red Cross certainly made a morally questionable decision here, but their decision is not surprising from an economic perspective.
A non-profit organization like the Red Cross cannot operate without funds; if a non-profit, humanitarian organization wants to expand, invest in new technology, or hire well-trained experts, that organization needs to raise money like any other business. In other words, non-profits have an incentive increase their revenue via donations even though they do not compete for profit on the market in the traditional sense. From this perspective, the Red Cross’s behavior after Hurricane Katrina makes sense. What better way to elicit donations than to appear to help during a tragedy and ensure that people know about it? To maximize their donations, the Red Cross needs to convince people that they are helping, not actually help. What good are good deeds if no one continues to donate?
The reality is that the Red Cross needs money to help people. Without advertising their acts and getting donations, they could not help anyone. Thus, humanitarian non-profit organizations face conflicting incentives when they try to grow their donor base and aid people. I call this the joint client problem of humanitarian organizations. I call it this because the two clients–donors and individuals in need–are the source of a humanitarian organization’s conflicting incentives.
Why do I call both donors and aid recipients clients? To figure out who a firm’s clientele are, we need to ask the following question: to whom do humanitarian organizations provide services? The standard answer is that they provide services to the people they help (victims of disasters for the Red Cross). Perhaps in an ideal world, this would be the clear answer, but it’s not. In reality, donors also receive services from these organizations. The donor pays the humanitarian aid company to do what it aims to do. If donors do not think the non-profit is accomplishing its mission, then the humanitarian organization’s funds will dry up. To exist, aid organizations need to answer to the people they seek to help and answer to people providing resources.
These conflicting incentives are not studied enough in economics, which is a shame because this may not be the most efficient incentive structure to aid the poor in times of crisis.