Market design for food banks
Food banks are charitable aid organisations which provide free food for those in need. In Germany, for instance, food banks have become one of the most prominent social movements, with more than 50,000 volunteers providing food to around 1.5 million people a year. However, many food banks are frequently experiencing supply shortages. An example from the US illustrates how a simple measure can not only make the allocation of food donations more efficient, but also lead to an increase in total donations.
The fact that food banks in Germany frequently have to deal with supply shortages is partially due to the fact that demand is continually increasing – in part due to the recent influx of refugees –, but also as a result of a reduction in donations as supermarkets are able to calculate with increasing accuracy how much fresh food they need on daily basis. In the US, the third biggest charitable organisation in the country, Feeding America (FA), receives large donations in the form of trucks filled with products from large retailers and food manufacturers and distributes these to around 210 regional food banks. However, these large donations only make up a fraction of total donations. FA distributes these large donations without knowing how much has been donated from local bakeries and supermarkets. As a result, the actual needs of the individual food banks are not taken sufficiently into account, since this information is usually only available to the food bank itself. Due to this information asymmetry, it was difficult for FA, firstly, to avoid wasting food and, secondly, to prevent donations from having to be thrown away, which is a particular concern for large donors.
Play money is introduced to establish food prices
In order to solve this information problem, FA set up a working group that brought together the heads of regional food banks and economists from the University of Chicago. The economists suggested using a specific market mechanism, namely giving
food banks play money which they could use to bid for donated food at auction. Prices from these auctions help to solve the information problem by indicating how much food banks value various food products. In order to ensure that the food banks most in need and with the largest catchment areas receive the most food, these banks receive a higher amount of play money as calculated using a distribution key based on catchment area size and the local poverty rate.
Online auctions help to allocate donations in a more targeted way
As part of their new procedure for donations, FA set up an online platform. Every day, more than 200 food banks across North America log on to the platform where lots of food donations are published on a daily basis – on average 30 to 40 lots a day. Each bank can participate in up to two auctions using their play money, which is distributed every morning and redistributed at midnight according to the same distribution key. By observing these artificial prices, FA is able to glean information on what types of donation are in particularly high demand (cereal, pasta and rice) and which are not needed so much (fruit and vegetables, dairy products and soft drinks). These prices often differ greatly from the prices one might find for the same products in a supermarket. For example, a kilogram of fruit at the supermarket costs several times as much as a kilogram of pasta. However, pasta has a higher nutritional value, has a longer shelf-life, and is therefore less likely to be donated by local businesses. This information was crucial in helping FA acquire new donations in a more targeted way.
Following the introduction of the new system, total donations rose from 125 to 175 million kilograms a year. This new method of distributing food donations is just one example of how advances in technology, science and research have helped to improve and individualise markets, which is the goal of successful market design.