Project 7: Recovery Fund Allocation
- Dr. Geoffrey Chua
- Dr. Fang Liu
- Dr. Gaoji Hu
When natural disasters occur, the International Federation of the Red Cross and Red Crescent Societies (IFRC) and its various member societies would solicit donations from the general public in both cash and kind. As with any other IFRC member society, for any disaster event, Singapore Red Cross (SRC) is tasked to allocate this fund to various project proposals meant to restore victims’ lives “back to normal”. The allocation procedure begins with funding requests from organizations such as NGOs or local government units with a recovery project in mind. Each organization will submit a proposal stating the project details. SRC will then determine whether and how much money will be allocated to each proposal depending on the proposal, with the help of a questionnaire.
The purpose of the questionnaire is to reduce, if not eliminate, the investment risk for SRC as it has an obligation to the donating public to ensure proper disbursement of funds. Investment risk involves various dimensions including the following three: (1) private benefit, (2) cross funding, and (3) equalization-centralization tradeoff. An example of (1) private benefit risk is when a city mayor proposes a project, but after receiving the funds, does not spend the money as proposed nor in good faith. For (2) cross funding, the SRC essentially prefers not to fund projects already funded by other sources such as other NGOs, governments, and private companies. For (3) equalization versus centralization, the mission of SRC is to try their best to help the most people with the most pressing need. It also wants to avoid the scenario where all the funding goes to only a few projects, creating “deserts and oases”.
The objective of this project is to assist an organization like SRC in assessing the effectiveness of their current questionnaire in the reduction of investment risk. Another goal of this project is to examine the role that information asymmetry plays in this allocation process. If the organizations hold private information that is not easily verifiable, how should SRC design the allocation rules so that the organizations will have no incentive to withhold the truth?