Feeding America More Efficiently: Q&A with Canice Prendergast of the University of Chicago Booth School of Business
Canice Prendergast, the W. Allen Wallis Distinguished Service Professor at the University of Chicago Booth School of Business, is an economist specializing in economic theory, labor economics, and organizational behavior. In 2004, Prendergast and three colleagues from the University of Chicago joined a group charged with redesigning the food distribution system of Feeding America, the nation’s largest supplier of food to regional food banks. The group came up with a procedure based on market mechanisms, an unlikely choice for a nonprofit organization. A decade and a half later, that method has significantly increased Feeding America’s efficiency in putting food on the tables of those in need — and once-skeptical food bank directors have become some of the system’s most enthusiastic fans.
A University of Chicago economist and a nonprofit hunger relief organization don’t seem like natural partners. How did you get involved in overhauling Feeding America’s food distribution system?
Feeding America is based in Chicago, so when they wanted experts to assess their allocation method, it made sense to come to us. Robert Hamada, one of my University of Chicago colleagues, asked me to join the working group charged with evaluating their system.
How did the old system work?
Feeding America, which was then called Second Harvest, was the traffic cop coordinating donations of food across the country from farms, manufacturers, and retailers and assigning the supplies to 210 regional food banks, which in turn sent the food to individual pantries, churches, and soup kitchens. In 2004, roughly 200 to 220 million pounds of food were distributed this way.
Say Tyson had a surplus truckload of frozen chicken or Kraft had a truckload of cheese to give away. Feeding America had to decide who got it.
Food banks were ranked according to metrics of need, which were called goal factors, and assigned an annual quota of food. This was determined using, among other things, local poverty rates. The food banks furthest from their goals were ranked highest and put at the top of the distribution list. A food bank that was offered a shipment could only say yes or no, and it had to arrange transportation.
Why did Feeding America want to change the procedure?
In some respects, the old system worked well. On any given day, 50 truckloads of food were delivered to food banks across the country. The poorest areas got the most, and the distribution method was widely thought to be transparent and fair. And, of course, an enormous amount of food was distributed.
But there were some fundamental problems. There was very little ability to tailor deliveries to a food bank’s individual needs. It was take it or leave it. Suppose a food bank was offered a truckload of yogurt, but its warehouse was already crammed with more yogurt than it could give away. In the worst case, Feeding America had to turn down donations because it was afraid it wouldn’t be able to place the food. Or food would spoil because it didn’t get sent where it was needed.
What did your working group propose as a replacement?
We met for almost a year and early on decided to explore a market-based allocation system. We didn’t want to use real money, so instead we came up with the idea of using a constructed currency, which we called shares. The food banks used their shares to bid on food, introducing an element of choice, so we named the method the Choice System.
The way it works is that bidding closes every day at noon and 4 p.m., and the results are disclosed immediately by email. It solves the yogurt problem. If a food bank is already loaded with a product, it doesn’t bid for it. Another food bank somewhere else that needs that product will step up.
In effect, you became the Federal Reserve of the food bank network. How did you decide how many shares to issue and who should get them?
As far as money supply was concerned, our objective was to keep prices stable. So we set up a system in which the annual change in the quantity of food determines the aggregate number of shares. As for how shares are distributed, we tried to make sure that the neediest food banks got the most.
In addition, at the end of each day, shares are redistributed to all food banks, and we start over again the next day. That’s a key point. When a food bank bids aggressively, the other food banks benefit because the shares spent end up in their hands. That creates a psychology not of “That guy just outbid me,” but rather, “That guy overpaid, which means more shares for me.”
Would you elaborate on that? How does that make allocations fairer?
We were determined to find a way to level the playing field among richer and poorer food banks. Some food banks have a lot of other sources of food — they’re food rich, in the language of the food bank world. We were concerned that these food rich food banks would think, “I have plenty of staples. I’m going to only use my shares to bid on the most desirable items, like peanut butter and frozen chicken.” And so these rich food banks might always win.
But the way the money supply works, whenever a food bank spends, say, 30,000 shares on a truckload of frozen chicken, those shares are given back to all the food banks in the network at midnight. As a result, there are general equilibrium effects. If the food rich food banks focus on really expensive products, it makes the staples really cheap. And that makes a lot of food available to the poorer food banks.
What else did you do to make sure the system operated efficiently and fairly?
To make the system work and ensure all food was distributed fairly, we had to devise a number of special mechanisms. For example, for hard-to-move products, such as some varieties of fresh produce, we put in place negative prices, so that food banks received shares when they took the items. We also set up a procedure called Maroon Pounds, in which a food bank could sell surplus food they got from other sources through the Choice System and receive shares in exchange. And we established a credit arrangement that allowed food banks to bid even if they didn’t have enough shares in their account and repay their debts over time.
What does the bidding show about which foods are popular? And do different food banks use different bidding strategies?
Peanut butter, chicken, and cereal tend to get the highest prices. The single most desired thing is pasta, but it isn’t available often, so if people see it, they pay up to grab it.
And there are differences among the food banks. Some are bottom feeders that want a lot of pounds of food, and they generally buy relatively cheap items. Others want the high-priced stuff, perhaps because they have access to a lot of staples from their local sources.
How has the system affected the overall supply of food Feeding America distributes?
The Choice System had two supply-side effects. First, Feeding America no longer has to turn down as many donations. It knows virtually anything offered will find a home, even if it takes negative prices to move it.
Second, it is able to solicit more donations because it knows the food won’t be wasted. What’s more, donors may have more confidence that the food is used well, which may prompt them to give more.
In the first seven months the system was in place, Feeding America got an extra 60 to 70 million pounds of food, and that’s pretty much kept up.
The food bank people you worked with spend their professional lives with folks who need food and haven’t benefited from a market economy. Was it hard to convince them to accept a market-based system?
Initially, many of them were skeptical. As you point out, they cater to people who have been marginalized by the market. In addition, some were afraid a market system would give advantages to food rich food banks in places like Los Angeles and Chicago over poorer ones in places like rural West Virginia. It wasn’t hard to persuade them of the benefits of choice. The harder part was showing that choice didn’t mean doing away with allocating food based on need. In the end, the vast majority of food banks voted in favor of the new system, with its checks and balances.
Today, some of the biggest skeptics have become outspoken supporters of the system.
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With writing help from Sam Zuckerman
