Private Solutions to Asymmetric Information Problems
Asymmetric information is a feature of many, if not most, transactions. My bank regulation students are particularly tired of hearing about AI issues. Purchase of any product entails some risk, even of a standardized product. There are situations where asymmetric information can create problems for transactions. The classic used car model of Akerloff, the so-called “lemons” problem is one market where there is such a problem. In the past callers to my radio visits expressed a similar concern with donations to charity.
The issue the callers had was twofold. The first problem was the selection of a charity. On this issue I had little guidance. Personal preferences clearly dictate preferences as far as charities. The second issue was making sure a charity was worth a donation. The concerns of several callers focused on whether the money would truly go to helping the people the charity assisted, or if it would go to paying administrator salaries. On this front I had little assistance as well in terms of specifics. The fact of the matter is you need to do the investigative legwork on the intended recipient to understand what they are going to do with the funds. Enter the private market to help with this.
The company Sevenly tries to help solve these asymmetric information problems with charities. Sevenly picks a different charity every week and sells t-shirts to raise funds for the charity. A portion of the t-shirt price goes to the charity. They explain this all very well on their web page (look at the Mission link at Sevenly.org). In the interest of full disclosure, I do buy products from Sevenly but have no financial interest with them nor any official relationship with the company.
I am not trying to raise money or awareness, well maybe awareness, and I guess if some people go to Sevenly and donate I won’t be sad. Sevenly explains why they work with a particular week’s charity and details where the money is going. The campaigns almost always go directly to assistance for people. For example, in the past there was a Kiva campaign and the proceeds went to making loans, not operational expenses. When the funds go to the operational expenses Sevenly makes it very clear that is the case. A notable case was that of Mercy Ships, a group that provides important surgeries for children in developing countries. The surgeries are performed on the ships and so the campaign raised funds for fuel costs. The campaign goal was to raise enough for one day’s fuel. Sevenly was very specific about what their fundraising efforts supported, as they are with every campaign they undertake.
So what is Sevenly doing, aside from raising money for charity? They are removing the asymmetric information problems for donors. The concerns the radio callers had about funds not really helping people are removed. Sevenly gets involved in the market and likely improves the outcomes for many of these charities and for the donors. This raises the interesting question of what would happen if this occurred in more markets. I’ll deal with those in a later posting, but for now I will leave it that companies like Sevenly demonstrate that asymmetric information problems can be overcome by the private market if the right approach is taken.