Summary: Large donors may create better incentives for both charities and small donors if, rather than providing fixed funding to a charity, they offer to match all donations to that charity over a relatively long time horizon.

Epistemic status: I just thought of this right before writing this essay and I haven’t talked to anyone about it or really thought it through.

“Large donor” is code for The Open Philanthropy Project, because it’s the only large donor where anyone working there has a >1% chance of reading this.

Large donors generally don’t want to provide too much funding to small organizations. Providing too much funding can lead to various problems¹:

• It can cause the organization to care too much about the opinions of a single large donor.
• It can make the donor look excessively responsible for the organization’s behavior.
• It harms the organization if the large donor ever withdraws funding.

Open Phil has attempted to avoid these problems by providing fixed-size grants that do not represent more than about a third (usually) of the recipient’s total budget.

Suppose you’re a large donor and you want to support a relatively small charity. You don’t want to be responsible for more than about a third of its budget, and it currently has $1 million. Then you could make a $1.5 million grant to be paid out in $500,000 chunks over the next three years–that would be a pretty typical strategy.

I have an idea for another way to do this that I believe provides better incentives to the charity and to other donors. Instead of making a fixed-size grant, commit to providing funding over the next three years, but make the grant sizes dependent on the organization’s budget. So instead of granting $500K per year, you grant an amount equal to 1/2 of the incoming revenue over the prior year.

For example: if a charity raises $1 million in 2016, you make a $500K grant at the beginning of 2017. Then, if the charity raises $1.2 million in 2017, you donate $600K at the beginning of 2018.

Upsides:

• You have the effect of magnifying any growth that the organization undertakes.
• You incentivize charities to seek out other sources of funding, because whenever they get more funding from other donors, they also get more funding from you.
• You incentivize other donors to donate more because you are effectively providing year-round donation matching.
• You don’t have to spend time worrying about what would qualify as an appropriately-sized grant and how that might change as the organization’s revenue changes; you just grant a percentage of revenue.

Downsides:

• This policy is more complicated–you have to do some extra leg work to track the organization’s incoming cash flow from year to year. (But I don’t believe this imposes too much additional effort.)
• It might not work well for organizations that have unpredictable revenue, such as those that rely on government grants. In that case it might be better to provide more funding in years when the organization receives less revenue from other sources.

There are probably other upsides and downsides that I haven’t thought of. But my initial impression is that this policy would work better than the status quo in most cases.