October 10, 2015

SECOND WAY ENDS, FIRST WAY MEANS:

What happens when America's Soviet-style food banks embrace free-market economics? (Alex Teytelboym, October 6, 2015, The Week)

Tens of millions of Americans rely on Feeding America, which has built up an impressive number of donors over the last few decades. Supermarkets usually donate food directly to their local food bank. But large food manufacturers often donate to Feeding America headquarters, which then allocates this food across its nationwide network of food banks. Sadly, the need for this service is only increasing, with demand for food banks going through the roof since the financial crisis. In 2007, 26 million Americans were on food stamps. Last year there were more than 46 million, an increase of almost 80 percent.

Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads -- even if they were already stocked with that particular food.

This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.

In 2005, the Chicago team helped design an auction-like system to allocate the food, and have been tweaking the system for a decade. Today, it runs as smoothly as eBay.

Every day, each food bank is allocated a pot of fiat currency called "shares." Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares. Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.

Posted by at October 10, 2015 9:15 AM
  

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