Getting out of the Intellectual Trap

When Profit-Driven Humanitarian Aid Might Save More Lives

By
Nepali Pit Stop
Getting out of the Intellectual Trap : When Profit-Driven Humanitarian Aid Might Save More Lives - Janika Albers

Abstract

Considering the increasing involvement of private, for-profit companies in humanitarian aid activities, this essay looks at the incentive structures and moral hazards of the industry. Its goal is to identify conditions under which profit-driven actors could increase the efficiency of aid delivery without compromising its humanitarian aims. The essay argues that when faced with informational asymmetries and the “temptation to cheat,” donors, for-profits and nonprofits compromise efficiency to differing degrees and in different ways. By spelling out these organizations’ respective predispositions, and their effects on performance, this essay answers when and why we should prefer for-profit to nonprofit organizations in the humanitarian aid industry.

Traditionally, humanitarian aid has been the domain of nonprofit actors. Yet in recent years, for-profit firms have increasingly begun to enter the industry, and given the direction of US policy in particular, additional involvement of private actors is expected.1 This development clashes with a persistent skepticism toward profit-driven companies riding high on human misery, be it the result of man-made or natural disasters. The common thought seems to be “that the private sector is greedy and uncaring and that corporations cannot be trusted with the problems of poverty alleviation.”2

Surprisingly, however, research on the role of the private sector in humanitarian aid activities remains scarce. This essay tries to address this gap, at least partially. The treatment is incomplete, because due to the simple lack of data, it does not contain empirical research about the functions in emergency relief assumed by for-profit firms. Nevertheless, it tries to shed light on the issue by drawing from the existent body of economic literature about the behavior of for-profit and nonprofit firms, through an examination of empirical evidence from similar sectors.

Looking at the initial entry into the humanitarian aid enterprise by for-profit actors, furthermore, this essay’s framing is normative rather than descriptive. It is valid to ask whether we want profit-driven service providers to play a role in emergency relief, and, if we do, under what conditions their involvement seems appropriate.

To be clear, however, the following discussion attempts to distance itself from the moralistic, far from enlightening sentiments mentioned above. Instead it focuses on incentive structures in face of informational asymmetries inherent to humanitarian aid provision. In other words, I will not address the fact that for-profit actors might generate competitive returns on the backs of the suffering, the starving, and the displaced, but will concentrate instead on the specific nature of the emergency relief market to determine how and when for-profit firms can make a positive contribution to the alleviation of human suffering.

The normative frame I apply can be subsumed in a simple test criterion: If saving lives is the ultimate goal of the humanitarian aid enterprise, how the number of lives saved is maximized ought to be subordinate to this goal. Profit-driven competition usually generates increased efficiency in markets. Given that for-profit actors improve the ability of humanitarian aid to save lives, we should simply ignore the potential bad aftertaste of profit-driven companies “helping people.” If one donated US dollar in the hands of a for-profit firm generates a higher return in terms of human life saved than a dollar in the hands of a nonprofit organization, a humanitarian donor, to make a choice consistent with his values, ought to choose the for-profit firm.

First, I will elaborate on the producer-consumer structure, the resulting lack of incentives, and inefficiencies within the humanitarian aid enterprise. Second, I search for reasons why nonprofit organizations, rather than for-profit companies, traditionally inhabit the industry. The following section gets to the core of the matter, namely the different predispositions of for-profit and nonprofit organizations in the face of informational asymmetries found in most emergency relief operations. Drawing on previous findings, the essay concludes with the case for involvement of for-profit actors in the logistics sector of the aid enterprise, and more recently in the area of disaster insurance.

Incentives and Efficiency in the Humanitarian Aid Enterprise

“In well-functioning markets an increase in competition is almost always good news for customers and bad news for incumbents […] [because of] its ability to push firms to innovate, cut costs, and respond to customer demand. But the aid system is at best a quasi-market.”3

What Harford et al. (among many others) call attention to is the specific producer-consumer structure of the humanitarian aid enterprise. Whereas in common markets the consumer of a produced service also purchases the service, in the humanitarian aid industry the end-consumers, i.e. the aid recipients, are not the purchasers of the service. Instead, the donors purchase the service in place of the aid recipients. The aid agencies, as the producers of humanitarian relief, accordingly sell their services; the donors buy them; and the targeted population affected by an emergency finally consumes them.

From this producer-consumer structure arise informational asymmetries. “Because of this separation between the purchasers and the recipients of the service, the purchasers are in a poor position to determine whether the service they paid for was in fact performed, much less performed adequately.”4 At one end of the transaction, the donors act without full information about the quality and cost of their purchased aid without that control that an end-consumer would normally have. At the other end of the transaction, aid recipients lack the power to “sanction” the low quantity and/or quality of the aid product given its cost. Information differs markedly between buyers and sellers. “[T]he intended beneficiaries have little ability to give feedback, and even when they do there is no mechanism by which the aid agencies suffer adverse consequences if the customers are dissatisfied.”5

Economics has treated such situations characterized by a lack of transparency and accountability as principal-agent problems. The principal – the donor in the case of humanitarian aid – possesses incomplete information about the performance of the agent, i.e. the aid provider. Consequently, the agent, or aid agency, might compromise the donor’s interest to efficiently transform his donation into aid. Easterly asserts:

With private information that is available to the agent but not to the principal, bureaucracies will ex-ante overstate the benefits of aid programs and understate the costs (adverse selection). […] Since nobody can tell whether the aid agency efforts are really making a difference, they have only weak incentives to exert effort (moral hazard).6 [... Accordingly] donor-principals face the problems of hidden action and information […] contractor-agents […] may conceal, withhold, or distort information harmful to their interests.7

Obfuscation is further enhanced by the overly complex structure of donors, donor channels, delegating and executing agencies as a study by McKinsey highlights, and with principals and agents multiplying, moral hazard problems increase.8

In this way the humanitarian aid industry lacks the proper incentive structure to align the interests of relief agencies and donors. The service that humanitarian aid providers deliver is beyond donors’ monitoring capacities; “without adequate monitoring recipients may appropriate the contractor’s resources for opportunistic gain.”9

Another problem arises due to the fact that a large part of activities connected to the provision of aid involve complex qualitative variables that are difficult to measure. Aid delivery is not simply a quantitative product. Often it involves human interaction between the giver and the recipient such as in emergency hospital treatment where the quality of medical care, while hard to measure, will most certainly have an impact on the number of lives saved. For example, if an aid agency deploys a particular amount of food, the effect of the food aid in terms of lives saved obviously hinges on to whom this food is distributed. Whether the aid deliverer conducts a careful needs assessment is as difficult to detect on part of the donor, as it is to prove on part of the aid agency. As the delicate relationship between output and impact of emergency relief itself would require a whole debate, an appropriate discussion goes beyond the scope of the argument presented here.10 In the following discussion I will therefore focus on two points: I define the effort to increase the impact of output (e.g. needs-based assessment) as a qualitative variable of emergency relief. The first simplification is that I assume that this effort actually translates into an increased impact (e.g. that the better needs-based assessment results in a higher number of lives saved). As such, impact becomes an attribute of output itself; output is now defined by quantity and quality. Second, I can thus refer to output without violating the (impact-oriented) criterion put forth in the introduction: the evaluation of relief efforts according to how many lives could be saved with a given amount of aid.

The preceding considerations have demonstrated that humanitarian aid delivery is a service neither easily monitored nor easily outlined in a contract. Most of the activities in the provision of aid involve important, immeasurable dimensions that aggravate moral hazard and contracting problems. These issues among humanitarian aid delivery agencies are not resolved by the entry of profit-driven agencies as Cooley and Ron claim.11 Nevertheless, such reasoning simply states that for-profit actors are not superior to nonprofit actors in the humanitarian aid industry. Does this mean they are equally (in)efficient?

First, we have to carefully spell out what we mean by “efficiency” in the humanitarian enterprise. Commonly, economic efficiency is defined as “the maximization of aggregate consumer and producer surplus.”12 However, as asserted above, the humanitarian aid sector is “at best a quasi-market.” With regard to humanitarian aid delivery, we do not wish the producers, or service-providers, to have a surplus. Nor do donors desire to simply maximize their “consumer” surplus. Donors will “buy” humanitarian aid services at their respective reserve prices with a belief about a specific minimum quantity and quality of the services being delivered. What donors (and I in the following) refer to as efficiency is maximizing output, namely aid products or delivery service, at a given “price.”13

Nonprofit and for-profit actors respond differently to the lack of incentives structures in the humanitarian aid enterprise. Given that both are susceptible to moral hazard, I contend that they do not compromise the efficiency of their aid delivery to the same degree, nor in the same way, but are guided by their respective predispositions.14 First, however, I will turn to the question of why traditionally nonprofit organizations rather than for-profit companies inhabit the humanitarian aid industry.

The Humanitarian Aid Industry as the Traditional Domain of Nonprofit Organizations

Though the question is not directly connected to the field of humanitarian aid delivery, economists have long been puzzled by the persistent growth of nonprofit organizations.15 Whereas initial investigations concentrated on historical developments and altruistic motives, studies increasingly began to focus on the economic role nonprofits play and why nonprofits concentrate in particular sectors rather than in others.16 A second research question inquired as to why nonprofit firms can compete with for-profit actors in these very industries.

At first glance, nonprofit, like for-profit organizations, constitute production units, so there is no apparent reason why output capacities should differ between them.17 Rather, the reasons why “nonprofits differ from for-profits […] must lie in how their organizational structures affect their operations.”18 The decisive difference between nonprofit and for-profit organizations is that unlike their for-profit counterparts, nonprofits are not obliged to distribute generated returns: “Nonprofit firms operate under a non-distribution constraint. No one has a legal claim to the organization’s earnings, but such firms may, in fact, earn surpluses. These funds may be reinvested in the organization, kept as endowment, or used for other charitable purposes.”19 Furthermore, governmental statutes commonly prescribe “reasonable” operating costs for nonprofit organizations thereby limiting the margins of managerial and employee compensations and benefits.20 Therefore, regulations determine the allocation of potential producer surpluses, as well as the origin of the nonprofit firms’ costs.

Now a valid reason why nonprofits traditionally inhabit the humanitarian aid sector can be discovered by looking at the high dependency of emergency relief on private donations. Who is better at attracting donations? It is not difficult to see that many donors will have ideas about the best use of funds they provide. The ideological foundation of most nonprofits, as well as the diversity of their respective philosophies, make this type of organization capable of satisfying such wishes: “Nonprofits are better positioned than either governmental or for-profit firms to serve this reification purpose. Government agencies are usually too constrained by legislative mandates and demands for uniformity, and for-profits must satisfy a market survival test.”21 Arguably the diversity in philosophies among agencies serves a positive function for accommodating donors’ equally diverse views.22

Secondly, as Rose-Ackerman suggests, their non-distribution constraint makes nonprofit organizations preferable to profit-driven organizations when donors are faced with a choice between the two.23 Easley and O’Hara depict quite vividly:

[I]n buying food for our own consumption we can observe the products we are purchasing. In donating money to feed Ethiopian famine victims, however, we are not likely to travel to Ethiopia to observe the delivery of the food. The nonprofit’s nondistribution constraint assures us that our entire donation will not end up in the manager’s bank account. If we donate to a for-profit firm, however, what assurance do we have that the money provides food to Ethiopians rather than profits to the owners?24

Even though for-profits could imitate the non-distribution constraint through specification of limits to profit-distribution in private contracts, high transaction costs of establishment and enforcement still render the for-profit disadvantageous vis-à-vis the nonprofit.25

Nonprofit organizations are better at accommodating donors’ interests insofar as ideological criteria direct the use of financial contributions. People’s common, intuitive uneasiness to put for-profit actors on a par with nonprofit actors in the industry is further caused by the fear that their voluntary donations are turned into profit rather than used for the intended charitable purposes. The legal statutes regulating the behavior of nonprofit firms, particularly the “non-distribution constraint,” assure that at least there will be sanctioning of such behavior, which, in addition, does not involve such high transaction costs as private contractual devices may. Both arguments not only illustrate that, through their superior ability to attract funding, nonprofits traditionally inhabit the humanitarian aid industry, but also that opaqueness is the biggest obstacle to humanitarian aid financing, and the humanitarian aid enterprise as such.

Nonetheless, when humanitarian ends are taken into account, it would be insufficient to look exclusively at the donors’ (justified or unjustified) preference for nonprofits, even though this seemingly explains why nonprofits rather than for-profits have come to dominate the aid sector.

Recalling that the ultimate goal of humanitarian aid is to maximize the number of lives saved, financial means should be allocated to the organizations through which they are most efficiently translated into aid output. In concrete terms, this means that if one donated US dollar in the hands of a for-profit firm generates a higher return in terms of lives saved than that dollar in the hands of a nonprofit firm, even if it was not used according to our (i.e. the donors’) ideological conception of how to employ it, and/or profits were deducted from the donation, we still should choose the for-profit firm.

In light of the preceding considerations, our central concern thus becomes the effect of the organizational cultures of for-profit versus nonprofit firms on their performance in the face of the ever-present informational asymmetries in the humanitarian aid sector.

Nonprofit vs. For-Profit Actors: Predispositions in the Face of Informational Asymmetries

The market structure of the humanitarian aid enterprise, along with its inherent informational asymmetries, yield the question of whether nonprofit and for-profit actors respond differently to their often misaligned interests with donors and the resulting threats of moral hazard and adverse selection. Both for-profit and nonprofit actors are subject to the “temptation to cheat” donors who cannot control the end product that they finance.

As I argue below, each type of organization indeed shows distinctive behavior due to the characteristics of its culture and accompanying incentive structures. Given that neither resists moral hazard, I assert that they do not compromise the efficiency of their aid delivery to the same degree, nor in the same way, but are guided by their respective organizational predispositions.

First, it seems reasonable to expect that nonprofit actors have “good intentions,” i.e. a moral or ideological commitment to delivering aid to those in need. Employees of nonprofit firms are likely to be “ideologues,” i.e. persons “with strong beliefs about the proper way to provide a particular service.”26 The renunciation of profits, and the resulting lower pay among the employees, suggests that there must be a moral reward making up the difference between the for-profit and the nonprofit salary. Otherwise, employees in the nonprofit sector would simply move to the private sector.

This view is confirmed by recruitment theories.27 Equally, empirical evidence exists for the claim that “high level professional employees may accept lower levels of pay in return for greater certainty that their efforts are actually helping to achieve their altruistic goals.”28 Whereas “entrepreneurs preoccupied with profits apply their talents elsewhere,”29 ideologically or morally committed employees are more likely attracted by nonprofit firms, since “the lack of equity holders is a signal to employees that their selflessness is not enriching someone else.”30 It becomes apparent that the nonprofit employees’ interests are more closely aligned with those of the donors than the for-profit employees’ interests are.

Accordingly, in the absence of donor control, we may expect the nonprofit employees’ moral and ideological commitment to counteract efficiency-compromising behavior induced by informational asymmetries. On the other hand, we have no grounds to assume such a behavioral corrective among employees of for-profit organizations.31 Nevertheless, this claim does not posit that employees of nonprofit organizations are resistant to prestige or do not engage in rent-seeking at all. Whereas ideological commitment counteracts efficiency-compromising behavior, it does not eliminate it. What it says, though, is that ideological commitment mitigates such behavioral tendencies.

Intuitively, “the nonprofit form of institution […] produces an incentive structure that leaves managers more neutral as between decisions that would increase profit and decisions that would do more to meet social needs, such as increasing aid to the poor.”32 The nonprofits’ legal constraint of non-distribution acts as a “broader contract” supplementing the discipline of the market, and improving the incentive structure.33 Thus, “[f]rom the viewpoint of modeling economic behavior […] under conditions of informational asymmetry, nonprofits may be valuable precisely because they face the constraint on distribution of profit.[…This constraint] is generally counterproductive when information is widely available, but it can play a useful social role when informational asymmetries are large.”34

However, this is not to say that the nondistribution constraint could simply substitute for the function of the ideological or moral commitment we find among nonprofit employees. Indeed, in the United States for instance, the state devotes few resources to regulation and enforcement of nonprofit corporation law.35 That abuses still remain the exception confirms that “ethical constraints may be far more important than legal sanctions in causing the managers of nonprofits to adhere to their fiduciary responsibilities.”36

Given that, due to informational asymmetries, both nonprofit and for-profit actors encounter weak incentives to exert effort in actually delivering their services efficiently, nonprofit actors will compromise efficiency to a lesser degree than for-profit firms. Therefore, nonprofits not only are an “institutional form potentially able to deal with asymmetric information,”37 but may evolve precisely in response to “a market niche when information asymmetry and trust are important.”38

Significantly, there is quite probably another difference between nonprofit and for-profit actors in their response to informational asymmetries. Apart from whether they compromise the efficiency of aid delivery to the same degree, it is a particularly interesting question to ask whether nonprofit and for-profit actors compromise efficiency in the same way. As mentioned before, in speaking of “efficiency,” we refer to maximizing output, i.e. the delivery of aid, at a given cost. To hold “costs” constant for comparative reasons,39 should not obfuscate that there are two variables involved in efficiency considerations regarding humanitarian aid: the output, i.e. quality and quantity of aid delivered, as well as the input, i.e. the cost of providing aid. In other words, efficiency comprises the provision of high quantities of quality aid at a low cost.

I argue that due to their predisposition, nonprofit actors are more likely to compromise on the cost side. By virtue of their ideological or moral commitment, they will avoid compromising the quality and quantity of their aid delivery as much as possible. But, they will produce it at a higher cost than necessary, and they are able to do so given the inherent lack of transparency in the humanitarian aid enterprise.40 Nonprofit firms, by virtue of their organizational structure and the employees they attract, thus have a “quality control advantage.”41 Empirical findings suggest that “higher quality comes at a cost:”42 “[W]hen nonprofits provide higher quality services, they may also charge higher prices to compensate, reducing their advantage”.43 Accordingly, while nonprofits are less prone than for-profits to give in to potential moral hazards and to compromise the quality of their output, they still display a higher tendency to engage in “adverse selection” of aid programs, as recognized by Easterly.

I contend that, by contrast, for-profit actors, not constrained by any sort of ideological or moral commitment, and that are by definition, profit-seeking, are more likely to operate at a comparatively lower cost. Nevertheless, they will tend to compromise their produced output, particularly in terms of qualitative characteristics that involve variables that are difficult to measure and difficult to define in a contract.44 Indeed, studies provide evidence that on average “for-profits [sic] firms provide lower quality and less expensive services.”45 If “purchasers of a firm’s output cannot ascertain whether the output is actually produced,”46 output quantity likewise may belong to this hard-to-measure category.

To summarize, we can state that the impact is dependent on the organizational form, i.e. nonprofit versus for-profit firms, in response to informational asymmetries inherent to the emergency relief sector. While it is reasonable to believe that in the face of moral hazards, nonprofit firms compromise the efficiency of their services to a lesser degree than for-profits, they are more likely to engage in adverse selection by overstating costs of particular programs they promote. At the same time, for-profit actors appear to display a more careful attitude toward the use of resources meaning they tend to be more cost-conscious. However, whereas nonprofits have a quality control advantage, for-profit organizations are more prone to compromise output-variables that are hard to measure, as is most probably the case concerning quality.47 As defined, lower quality lessens the impact of the aid delivered.

In light of these findings, what conclusions follow? Are for-profit providers able to provide a remedy for persistent inefficiencies of the emergency relief industry? I suggest that despite the negative aspects of for-profit actors’ performance spelled out in the preceding discussion, these very considerations should help us to identify the conditions under which for-profit actors can contribute to the ultimate goal of maximizing the number of lives saved. Moreover, they should highlight with what kind of inefficiency a “true” humanitarian will be more concerned.

What Follows? Making the Case for For-Profit Actors

In the case of informational asymmetries stated above, it appears that nonprofit organizations compromise efficiency at the input stage, while for-profit organizations compromise it at the output stage. Vis-à-vis the goals of humanitarian intervention, if we take it as the declared aim of the humanitarian enterprise to save the maximum number of lives and we cannot eliminate the inefficiencies inherent to the industry, we might do better to accept higher costs to achieve that aim rather than compromise the aim itself. That is to say, given the alternatives, we care more about the output than the input of humanitarian aid.

However, referring to our initial considerations, we have in fact identified the cases in which we must neither accept higher costs, nor compromise the humanitarian aim itself. By looking at economic incentive structures, the preceding argument has revealed valid reasoning, why and when we should actually prefer for-profit actors, and why and when not to do so. “[P]rivate firms are the preferred institutional mechanism when all of the desired characteristics of a commodity or service can be stated in a contract and monitored easily.”48 Therefore, “[t]he more important the unmeasurable dimensions, […] and the more complex and ambiguous the proposed measures, the stronger is the social efficiency case for the nonprofit alternative.”49 Moreover, “there may be a case for […] [the nonprofit] that explicitly divorces rewards from the easily measured aspects of performance when those measures do not accurately reflect the quality of the output.”50

In other words, we can in fact now estimate when our donated US dollar in the hands of a for-profit firm is likely to be more efficient than the same dollar in the hands of a nonprofit. The common, deeply moralized discussion about the involvement of for-profit firms in the humanitarian enterprise depicts a “self-imposed intellectual trap”51 that hinders the achievement of such important insights, and contributes little. In the words of Hansmann, “[it] is commonly suggested that certain services […] are organized on a nonprofit basis because it would be unthinkable to have people profiting from the misery and ill health of others or to leave the availability of such vital services in the hands of profit-seeking entrepreneurs. Such reasoning is unpersuasive. […]The central factor, rather, seems to be contract failure.”52

In line with these conclusions, I would see a limited yet distinct role for for-profit service providers where it is possible to state quality dimensions and the requisite accountability in contracts, and/or where qualitative dimensions may be dominated by cost considerations. For instance, there is no human dimension to the service provided during the logistical stage of humanitarian intervention, and few non-accountable qualitative variables in general. Consequently, for-profit actors might well be more efficient in this area.

Another area where for-profit actors can contribute to capacity is disaster risk management. This specifically illustrates how moral preconceptions could lead the sector to miss out on innovative approaches with potentially high benefits. As there are no informational asymmetries at all, according to the argument developed, involvement of for-profit actors is completely unproblematic. Disaster risk management includes predicting the scale and consequences of disasters, like earthquakes and droughts, and the financial means needed to mitigate their impact on livelihoods. Insurance instruments such as index-based weather derivatives or catastrophe bonds are used to transfer disaster risk to private capital markets.53

Essentially, these novel insurance instruments are based on physical triggers that can easily be stated in a contract, and allow quasi-perfect monitoring.54 Hard-to-measure variables are not involved. Once specified in a contract, the for-profit derivative or bond investor cannot influence the output defined in pure monetary terms. At the same time, the capital market, through the respective prices of the insurance instruments, grants transparency about “inputs,” or costs at given benefits. The very absence of informational asymmetries between donor and for-profit contractor, as well as potential market demand, make the donor-subsidized provision of risk insurance on the micro and macro level a promisingly efficient future supplement to traditional aid programs.55

In conclusion, moral hazards and contractual complexities among humanitarian aid delivery agencies are not resolved by the entry of profit-driven agencies. In areas of the industry such as logistics or insurance-based disaster risk management, it is possible, and probable, that the existence of for-profit firms may spur the efficiency of the enterprise, and therefore contribute to humanitarian aims.

Notes

1 “…traditional Republican scepticism about the utility of international aid remains undiminished and […] other delivery channels – for example those provided by the private sector […] might take a market share from “traditional” aid deliverers if they can demonstrate greater impact and efficiency (and presumably malleability) than the conventional aid system.” Nicholas Stockton, “The Changing Nature of Humanitarian Crises,” The Humanitarian Decade (United Nations Office for the Coordination of Humanitarian Affairs: United Nations Publications, 2004) p. 34.

2 C.K. Prahalad, The Fortune at the Bottom of the Pyramid (Upper Saddle River, NJ: Wharton School Publishing, 2005) p. 9.

3 Michael Harford, Bita Hadjimichael, and Michael Klein, „Aid Agency Competition,” Public Policy for the Private Sector, Note No. 277, The World Bank Group Private Sector Development Vice Presidency (October 2004): p. 3.

4 Henry B. Hansmann, “The Role of Nonprofit Enterprise,” Yale Law Journal Vol. 89 (April 1980): p. 847.

5 William Easterly, “The Cartel of Good Intentions: Bureaucracy vs. Markets in Foreign Aid,” Policy Reform Vol. 00, Center for Global Development (Washington 2002): p. 22.

6 Ibid., p. 22.

7 (Cooley and Ron, 2002:15) Alexander Cooley and James Ron, “The NGO Scramble: Organizational Insecurity and the Political Economy of Transnational Action,” International Security 27, No.1 (Summer 2002): p. 15.

8 McKinse y& Co: Delivering the Promise of Humanitarian Assistance: The Role and Performance of the UN – Appendix A (Exhibits), Inter-Agency Working Group on Humanitarian Aid Coordination (London: October 2002). As Easterly specifies, “[p]rincipal-agent theory says having multiple principals dramatically weakens the incentives for the agent (the international agency). “[…] Having many agents monitored by the many principals makes things worse, as the joint product of the many agents makes it hard to evaluate the efforts of any one agent.” (Easterly, p. 23)

9 Cooley and Ron, p. 16.

10 Needs-based assessment, e.g., is by far not an indisputable procedure to increase the impact of humanitarian aid. It may place incentives for aid-recipients in their struggle of survival to demonstrate non-existent needs and “fool” the scheme applied by the aid agency.

11 Ibid., p. 6.

12 Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, 6th edition (New Jersey: Pearson Prentice Hall 2005) p. 306.

13 Of course, one could argue, that an increased price of aid-/service-units, i.e. less quantity provided at the same price, might result in decreasing demand on the donors’ side to purchase aid. Yet as this does not contribute to the subject of my following investigation, I will not further discuss this point.

14 As Rose-Ackerman puts it: “The impact of organizational form on firm performance and survival depends upon the interaction between institutional structure and other features of the environment such as entrepeneurial motivations […] and the overall competitive environment. No organizational form is invariably superior, but one can isolate factors that will favor one form over another.” Confer Susan Rose-Ackerman, “Altruism, Nonprofits, and Economic Theory,” Journal of Economic Literature 34, No.2 (June 1996), pp. 701/2.

15 See, for instance, Paul J. DiMaggio and Helmut K. Anheier, “The Sociology of Nonprofit Organizations and Sectors,” Annual Review of Sociology 16 (1990), pp.137-159.

16 David Easley and Maureen O’Hara, “The Economic Role of the Nonprofit Firm,” The Bell Journal of Economics 14, No.2 (Autumn 1983), pp.531. Nonprofit firms “are encapsulated in a relatively small, albeit important, set of industries […] in the United States, hospitals, daycare, museums, universities, home health care, social services, broadcasting, and a few others” (Dimaggio and Anheier, p. 139) and “virtually all nonprofits […] are producers of services”(Hansmann, p. 872).

17 “Nonprofits, like their profit-oriented counterparts, use inputs – labor and capital – to produce outputs – goods and services. Viewed this way, it is apparent that nonprofits are firms and that whether a firm is for-profit or nonprofit does not determine the output it is capable of producing.” (Easley and O’Hara, pp. 531/2).

18 Easley and O’Hara, p. 532.

19 Rose-Ackerman, pp. 715/6). For a more detailed account, confer Hansman, pp. 838-40: “What makes an organization nonprofit?”

20 Easley and O’Hara, e.g., in order to distinguish nonprofit from for-profit firms in their contracting model, simply differentiate according to whether the managerial, employees’ compensation respectively is specified (nonprofit), or unspecified (for-profit). (Easley and O’Hara, p. 532.)

21 Rose-Ackerman, p. 717. The same advantage of nonprofits holds vis-a-vis UN agencies. As Minear and Smillie report: “National NGOs, in their advocacy as well as their delivery modes, are often more attractive to donors than more remote, bureaucratic, and sometimes unpopular UN organizations “The Quality of Money: Donor Behaviour in Humanitarian Financing,” Humanitarianism and War Project, .” Larry Minnear and Ian Smillie (April 2003) Feinstein International Famine Centre, Tufts University, p. 11. <http://hwproject.tufts.edu/new/pdf/ donor_behav.pdf>

22 See, for example, Caroline Moorehead, “Speak No Evil” Financial Times 19 June 2005; Mary Anderson, Do no Harm: How Aid Can Support Peace – Or War, (Boulder: Lynne-Reinner 1999); or David Rieff, A Bed For the Night (New York: Vintage 2002).

23 “Given the difficulty of monitoring charitable work, donors may fear that for-profit firms will convert gifts into profits for their owners. Although nonprofit managers can, of course, embezzle or misuse funds, at least using a nonprofit for private gain is illegal.” (Rose-Ackerman, p. 716.)

24 Easley and O’Hara, p. 532. See also Hansmann’s account led by the question: “If you rely on a for-profit distributor to provide the food to feed your own children, why should you not also turn to a for-profit firm to provide the food you purchase for children overseas?” (Hansmann, pp. 846/7.)

25 “Under the contractual approach, the patrons would need to insist upon receiving regular, audited financial statements from the firm containing sufficient detail to permit the patrons to determine whether the owners are adhering to the contractual constraints. Should it appear to a given patron at any point that the owners are not keeping their promises, then the patron would need to bring suit to enforce the contract. In contrast, under the nonprofit form, the state is empowered to bring suit if the organization’s management compensates itself too generously.” (Hansmann, p. 853.) 26 Rose-Ackerman, p. 719.

27 “Recruitment theories hold that NPO [nonprofit organization] employees are willing to work for less because their values differ systematically from those of employees of FP [for-profit] firms: […] NP [nonprofit] employees value job quality more and wages less than FP staff.” (Dimaggio and Anheier, p. 148.)

28 Rose-Ackerman, p. 720.

29 Dimaggio and Anheier, p. 140.

30 Ibid.

31 For proof, Rose-Ackerman for instance asserts that empirical evidence collected by Weisbrod shows that, e.g., “nonprofits providing long-term care generally take less advantage of their informational superiority over customers than do for-profits” (Rose-Ackerman, p. 722). While long-term care and post-disaster assistance are quite different situations, decisively they carry the same characteristics of informational asymmetry on which my argumentation rests.

32 Burton A. Weisbrod, “Rewarding Performance that is Hard to Measure: The Private Nonprofit Sector,” Science, New Series 244, No.4904 (May 1989): p.543. “Unlike private enterprise, such an institution [the nonprofit organization] does not reward sellers who take advantage of consumers’ informational handicaps.” (Ibid., pp. 541/2.)

33 “The nonprofit producer, like its for-profit counterpart, has the capacity to raise prices and cut quality in such cases [of informational asymmetries] without much fear of customer reprisal; however, it lacks the incentive to do so because those in charge are barred from taking home any resulting profits. In other words, the advantage of a nonprofit producer is that the discipline of the market is supplemented by the additional protection given the consumer by another, broader ‘contract’, the organization’s legal commitment to devote its entire earning to the production of services.” (Hansmann, p. 844.)

34 Weisbrod, p. 542.

35 Hansmann, pp. 873-4.

36 Ibid., p. 875.

37 Ibid.

38 Rose-Ackerman, pp. 722. Concerning the humanitarian aid enterprise, one should, however, not overstate the case for nonprofit organizations. A vast literature refers to the negative effects and inefficiencies of the industry due to the lack of transparency and accountability. Following the subject of the essay, the reader should not forget that the present argument specifically aims at taking a comparative perspective of nonprofit versus for-profit actors in emergency relief.

39 As explained, this seemed appropriate in the case of humanitarian aid, as donors will make contributions at their reserve price.

40 Weisbrod confirms this view: “If a seller is able to benefit from added profit, the incentive exists to “chisel” – to provide lower quality than was promised. If, however the seller is effectively prevented, by the nondistribution constraint, from reaping benefits from any profit generated through underproviding quality, the incentive to chisel is weakened. At the same time that this adverse incentive is reduced, however, so, too, there is a weakening of the manager’s incentive to be efficient.” (Weisbrod, p. 543.)

41 Rose-Ackerman, p. 719.

42 Ibid., p. 722.

43 Ibid.

44 Hansmann calls this case a “contract failure” and finds nonprofit organizations to be the market response to “police producers by ordinary contractual devices” (Hansmann, 1980: p. 845.)

45 Rose-Ackerman, p. 722 (in this specific example, referring to child care). In terms of economic theory, “[w]hen quality is costly for buyers to monitor, provision of higher quality is financially unrewarded and, hence, is unprofitable, however socially valuable it might be.” (Weisbrod, p. 544.)

46 Easley and O’Hara, p. 532.

47 For a very interesting, economic model of explanatory strength see Hansmann, pp. 899-901 (Appendix). The model treats the screening of ideologically committed employees, managers respectively, as well as the quality signaling of the nonprofit organizational form alongside for-profit actors and implications for the market.

48 Easley and O’Hara, p. 531.

49 Ibid.

50 Weisbrod, p. 542.

51 Prahalad, p. 9.

52 Hansmann, pp. 880-1. Italics mine.

53 Index-based weather derivatives are “contingent contracts with a payoff determined by future weather events, such as a specified lack of precipitation measured at a weather station” (Joanne Linnerooth-Bayer, Reinhard Mechler and Georg Pflug, “Refocusing Disaster Aid,” Science, Vol.309 (August 2005) pp.1045). A catastrophe bond can be explained as “an instrument whereby the investor receives an above-market return when a specific catastrophe does not occur within a specified time […] but sacrifices interest or part of the principal after the event.” (Ibid.)

54 Linnerooth-Bayer, Mechler and Pflug, p. 1045. Given investment in new technologies that electronically convey weather data, and prevention of bribery of reporters of weather station readings, respectively. (Jerry Skees, et al., “Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?” in Stefan Dercon, (ed.) Insurance Against Poverty (Oxford: Oxford University Press, 2005) pp. 432-3.

55 Skees, et al., p. 422.

Janika Albers, an M.A. candidate at the Bologna Center, holds a B.A. in philosophy and economics from the University of Bayreuth, Germany. She has worked in development in Cameroon; on human rights issues in South Korea; and, most recently, for an academic quarterly in Germany.