How a network of food banks learned to feed more people by embracing the free market

See The Invisible Helping Hand by Ray Fisman and Tim Sullivan at Slate. Ray Fisman is the Slater family professor in behavioral economics at Boston University. Tim Sullivan is the editorial director of Harvard Business Review Press. Excerpts:

This involves "America’s Second Harvest (now called Feeding America), a clearinghouse that takes surplus food from grocery stores, food producers, and farms and distributes it among a network of food banks across the country."

"the clearinghouse worked something like this: A donor company, say Kraft, would notify Second Harvest that a load of macaroni and cheese was available for pickup. Second Harvest management would then offer the shipment to one of 200 food banks around the country based on need, proximity to the pickup locale, and a formula that dictated how many pounds of donations each affiliate was entitled to each year. The local food banks were responsible for shipping the donation. Once the food arrived at the affiliate’s warehouse, volunteers sorted it, entered it into a computerized grocery list, and made it available for local charities that served the hungry and poor."

"it was far from optimized. Food banks might provide feedback on their likes and dislikes, but at its core, the Second Harvest allocation still resembled 1960s-era Chinese central planning (which, free-market economists will note, helped to cause the Great Famine of 1959–61)."

There were problems  like "sending potatoes, unbidden, to a foodbank in Idaho that already had warehouses full. Or delivering milk to a bank that didn’t have the refrigeration capacity to store it and so would end up throwing it away. In fact, Second Harvest would sometimes turn down food donations from giant food companies because they weren’t sure where to send it. Second Harvest was also, at the time, treating different kinds of food as the same."

"Early on, Prendergast (an economics professor) and his colleagues brought up the idea of using something like a market instead. As Prendergast imagined it, the currency in a Second Harvest market would be points, or shares, that would be distributed among the member food banks. These shares could then be bid on food donations as they arrived in Second Harvest’s system each day. In a sense, nothing would change. Kraft would offer a container load of mac and cheese, and it would be allocated to a food bank affiliate to feed the hungry. But instead of being distributed by Second Harvest’s central office, the food bank that wanted it the most would express that preference by parting with precious shares to get it."

"Under their proposed system, no money was to change hands. Kraft, Kroger, and others were donating their food, not selling it (though they did receive a tax write-off), and America’s Second Harvest, itself a charity, wasn’t taking any cut of the proceeds. A market or marketlike system would simply be a better way of efficiently matching the supply of food donations to food bank needs."

"It soon became clear to the Booth team that the main barrier to improving Second Harvest’s distribution system wasn’t devising an efficient market. The bigger challenge was making it seem fair to skeptics"

"Under the initial proposal, shares were to be allocated based on the poverty head count in each affiliate’s service area. The same food banks with the staff to track food auctions in real time were also located in population-dense urban centers, which would entitle them to a higher allocation of shares. They’d always end up getting the good stuff."

"Instead of an eBay-style system of shipments that appeared and expired in real time based on the flow of donations, offers accumulated throughout the day. Then, the following morning, each food bank would receive the full list of items up for bid to consider. Every food bank would have the opportunity to review the listings and make its best offer on each one through a sealed-bid auction. The winning bidder would send a truck to collect the donation, and the shares from its winning bid would get split up among the rest of the food banks in the Second Harvest network.

This last point might not seem like a big deal: If everyone gets some extra shares, then it won’t make anyone richer; it’ll simply make prices rise through more aggressive bidding. But, Prendergast recalled, it totally changed the psychology of losing an auction from “the rich bastard outbid me again” to “that chump overpaid again—more shares for me!”"

"It turns out that there’s a Depression baby inside of each of us: Food bank presidents, the market designers discovered, were hoarders of shares. To keep the market from dipping into a deflationary spiral, Prendergast needed to pump extra shares into the market to encourage bidding. There was also the ebb and flow of goods into it to consider. Some days, Kraft might dump half a dozen container-loads of mac and cheese into circulation; other days there’d be none. If everyone used their points to bid on mac and cheese, the prices of, say, potato chips and broccoli would plummet, not because broccoli was suddenly worth less, but because of a temporary surge in the supply of more desirable donations. So extra shares would need to be put into circulation to prop up prices—lest Arnold see last week’s lower price of potato chips and bid too timidly on them, misinterpreting short-run price declines as permanent ones. Similarly, in a dry spell of donations, shares would be withdrawn from the market: Since there was so little to bid on, there would be a run-up in prices unless the number of shares also declined.

Another unanticipated consequence of “marketizing” food distribution—this one positive—is that prices gave Second Harvest’s leadership a sense of what kinds of donations were most valued by affiliates. Prices revealed that peanut butter and noodles were the two food types most valued by food charities. Frozen chicken wasn’t far behind. They’re all storable, calorie-dense, reasonably nutritious foods that people will actually eat. In a free-market economy, these signals would motivate suppliers to ramp up production of popular items or motivate new entrants to enter the popular market. In the charity context, popularity didn’t matter to the suppliers, but it motivated the central office at Second Harvest to hunt more aggressively for donors of frozen chicken and peanut butter, less so for potatoes, and least of all for potato chips. In fact, chips, a bulky, fragile junk food, are so little valued by food banks that sometimes their prices turn negative, so a food bank receives shares in exchange for the cost and hassle of picking up the shipment. Kale and broccoli were better than Doritos, but not by much; you can’t feed the hungry if all you give them is stuff they can’t cook or won’t eat."

"the annual supply of food donations increased by 50 million to 100 million pounds as a result. Twelve million pounds can be traced directly to the market itself, in the form of excess donations that flush food banks placed into the market in exchange for shares. That’s 12 million pounds of food that would otherwise have been wasted. Based on his analyses, Prendergast estimates that if anything, the smaller food banks benefited the most from the new system."