Why fake money is better than real money at feeding the hungry

An esoteric market idea revolutionized food banks. What else could it do?

Credit: Glen Gyssler

Dee Gill | Nov 21, 2016

Sections Economics Strategy

Collections Philanthropy

If you love markets, it’s a good time to be alive. Almost everything you could ever need is on sale in online marketplaces. The sharing economy has extended existing markets for hotels and taxis: if you are traveling, you can book a room in someone’s home, and be driven there by someone you hailed on Uber or Lyft. Markets govern financial trading, ad rates, and the amount you pay for jeans.

In most cases, these markets run on currency—if you want something, use money to pay for it. Alternative markets are relegated to neighborhood babysitting co-ops and barter exchanges. And fake-money markets sound like they belong in the board game Monopoly. 

But a study of an established fake-money market has Chicago Booth’s Canice Prendergast rethinking the possibilities for these unorthodox systems. Prendergast analyzed data from a fake-money market he helped establish for Chicago-based Feeding America, a nationwide nonprofit that matches food from manufacturers with food banks that need it. 

The benefits of the market far exceeded his expectations. “It was a bit of an eye-opener to me to see how big the gains were,” says Prendergast, who studied the market’s operations between 2005 and 2011, totaling about 65,000 transactions. “I knew things seemed to be going well, but I didn’t realize quite the extent to which they were going well.”

The market, which Feeding America calls the Choice System, greatly increased the amount of food collected by the food banks. Within seven months of implementation in 2005, Feeding America’s food supply increased roughly 36 percent. Between 2006 and 2011, its annual supply of food to give away rose to 340 million pounds, from 220 million. “To put this from the perspective of another lens,” Prendergast writes, “an increase in supply of 100 million pounds a year is equivalent to providing a full day’s food for roughly an extra 60,000 people every day.” 

With the magnitude of the market’s success, Prendergast says, “I can see this being replicated.” In fact, it’s being replicated, in and out of Feeding America.  

Fake money promotes fairness

Money works fine in most markets. Buyers and sellers bring money, goods, and information to a marketplace, and then haggle, deal, or trade their way to a price. Markets are adept at making needs visible when consumers have equal resources. Market prices, and the incentive for consumers to conserve currency for future purchases, ensure that goods go to the buyers who need them most.

A fake-money market works exactly the same way as a real market, but uses a play-money substitute for real currency. Typically the organization holding the goods to distribute sets up a market where those goods are auctioned off on a regular schedule. The bidders use points or shares that are distributed to them equally (or the fair equivalent of equally) in advance.

Fake-money markets are best suited for situations where people want the benefits of a market but have a compelling reason to think that a real-money market wouldn’t be fair, explains Chicago Booth’s Eric Budish, who recently revamped a fake-money market for Wharton. People may want the efficiency a market can bring but also want participants involved to be armed with a defined amount of “money.” 

For example, at Booth and other graduate schools, some courses are more popular than others. Schools could allocate seats using a conventional market, by ramping up prices for the most-popular courses. But to ensure that rich students don’t have an unfair advantage, some schools instead use fake-money markets—they give first-year students a certain number of points they can use through their graduate careers to bid on seats in courses they want. Popular courses require the most points, rather than the most cash.

Course-allocation auctions are a textbook example of fake-money markets, largely because few other examples exist. There are neighborhood babysitting co-ops that use points, and there are barter systems that swap one good or skill for another. Some hospitals are using fake-money markets to schedule emergency-room nurses. But fake-money markets are otherwise little used because, as Budish points out, real-money markets typically solve most allocation problems. Some employers do auction off in-demand vacation days, but more probably offer overtime pay for holiday work, and employees who need the extra money will choose to work those days. 

Many employers do the latter, but that leaves hanging the issue of fairness: people who have enough money have a better chance of taking holidays off. Fake-money markets aren’t a replacement for using money; they offer something different. They are, says Budish, “a way of realizing the benefits of using markets in corners of the economy where that didn’t seem possible.” Prendergast’s research, as well as Budish’s study of Wharton’s system, suggests that in the right circumstances, fake-money markets can provide extraordinary benefits. 

Fake money meets food banks

For Feeding America, the fake-money market resolved distribution problems that real money never could. A decade ago, Feeding America (then called America’s Second Harvest) approached four faculty at Chicago Booth—Harry L. Davis, Robert S. Hamada, Donald D. Eisenstein, and Prendergast—to join a task force working to solve several issues. Feeding America wanted a more efficient and transparent way of distributing donations to member food banks around the country. 

A market fueled by fake money

Feeding America acts as a remote clearinghouse for food donations from big businesses such as Tyson, Kraft, ConAgra, and Wal-Mart, which donate surplus food. When Tyson has a truckload of chicken on offer in Little Rock, Arkansas, Feeding America contacts a food bank to go get it—or at least that’s how it used to work.

Traditionally, Feeding America assigned these truckloads, without much consideration of content, on a sort of rotation system. The food banks could accept the food and pay transport costs to receive it, or they could decline it. In an attempt to get the biggest share to places with the biggest needs, the organization set allocation amounts for each food bank based on the bank’s size and the poverty level of the population it served. It also took into consideration proximity. The organization tried to figure out who needed what, in part by guessing. 

But Feeding America recognized it had several problems with this system. Food banks often accepted food that they did not want. Idaho banks were offered potatoes they did not need, while others took in sodas, which were both expensive to transport and low in nutritional value. If a food bank declined a donation, the food it declined counted against its future allocations, plus it created potentially awkward situations with donors that Feeding America wanted to keep happy. Meanwhile, a food bank desperate for protein, or hitting a dry spell with local donors, had no efficient way of finding out which nearby sources had excess. Feeding America wanted to send the most food to the neediest places, but it didn’t know where those needs lay on any given day. 

A traditional market wouldn’t have worked—taking the food banks’ money would have run counter to Feeding America’s mission. The task force proposed a different system, the fake-money market. Feeding America gave each food bank an allocation of shares (the fake money) based on the same size and poverty-level criteria. Descriptions and locations of every truckload of food the organization sourced were entered into a website, where auctions went live twice a day. At each auction, food banks used their fake money to bid on what they wanted. 

Feeding America found that it could quickly match corporate donations to the food banks that needed them most. Because it knew placement had become more efficient, it accepted more donations, thereby increasing food supply. Food banks in turn added their own overstocks of locally sourced goods to the market. 

The fake-money market turned out to be a tool that improved both efficiency and fairness relative to Feeding America’s old system of assigning donations. The food banks reported greater satisfaction with the Choice System, even though a quarter of them collected half as many pounds of food as they would have under the old allocations. In a demonstration of efficiency, they saved their fake money to buy the higher-quality, more-expensive goods that they needed most. 

The market accurately priced goods to reflect demand from its consumers, a group whose concerns for spoilage and nutrition make them distinct from most grocery shoppers. In Feeding America’s market, peanut butter and noodles were the most desired foods. Truckloads of pasta and rice were expensive, while milk and cheese were relatively cheap. A single pound of cereal sold for more shares than 120 pounds of produce. In fact produce often traded at negative values. If Feeding America received a donation of broccoli, say, and the demand for that was low, Feeding America gave food banks points to take the broccoli. 

Feeding America's supply
Prices and amount of items, 2005–2011

How to make fake-money markets work

The consistency of the Feeding America auction is crucial, says Prendergast. Fake-money markets require busy and ongoing trading that participants trust will continue day in and day out, with more good spending options consistently coming to auction. Consumers and food banks must have that faith, he explains, or they would have every incentive to immediately spend their entire account, regardless of need. When that happens, market efficiencies are lost as bidders dump soon-to-be worthless points, or attempt to game the system. Feeding America’s Choice System works because members have opportunities to spend their shares on 50 or so truckloads of food twice daily—today, tomorrow, and for pretty much every workday to come. 

How a fake-money market helped MBA students

In theory, fake-money auctions are straightforward copies of traditional markets, with points replacing cash for transactions. But creating a successful one in real life is tricky.

See more

But attention to detail in the market’s set-up—in Feeding America’s case, dozens of details specific to the project—is particularly critical. “It may be that it is not the broad match of the concept of fake currency to the problem that generated its likely success, but rather the myriad of small details that got it over the line,” Prendergast says.

Budish came to the same conclusion when revising Wharton’s course-allocation market. There’s no one-size template for establishing a fake-money market that will work. “In market design,” he says, “tiny details make a huge difference.”

For Feeding America, an important wrinkle was a clause that redistributed to all members the sales proceeds at the end of each day. At midnight, any fake money spent on a given day was split up and returned to food banks. That went a long way toward assuaging disappointment a food bank might have felt after losing out to a higher bidder, as everyone benefited from the higher price paid. 

Also crucial were provisions for splitting bids, buying on credit, and collecting shares for hard-to-move goods. The details included a fairness committee, set up to handle any grievances with the system. So far the committee has not been tapped, but it nevertheless helped gain member trust, which in part led to the success of the system.

What else fake money could do

Nonprofits and similar institutions tend to determine need and then use centralized systems to allocate the goods and services they offer. Prendergast’s work offers a way to judge if market forces could better serve this group’s goals. His paper includes the first model for empirically evaluating welfare implications of moving from central assignment to a market system, and it can be adapted for research beyond food banks.

He has been mulling over several situations that might benefit from fake-money trading. For example, he says, the US Department of Defense takes thousands of satellite pictures a day that might be useful to many government agencies. There are far too many images to study in a day, and almost infinite possibilities for directing the cameras. Defense needs a way of judging where it should be looking, and where to assign employees for any specific project. A suggestion made to Prendergast was that a market in which other departments that want the images are assigned a fake currency to bid for control—perhaps time slots for use of the technical and human resources—could help the department prioritize analyses. The highest bids would represent the most-urgent demand. 

Similarly, scientists vying for time with coveted pieces of equipment, perhaps a high-powered telescope, might be required to bid for time slots to use it. The institution or department holding it would issue points to each potential user, either in equal amounts or weighted to favor certain users. The scientists decide how to spend the points: perhaps all at once if a time slot is critical to research, or in smaller allocations to allow multiple uses. 

Employers can use fake-money markets to allocate popular vacation days, particularly in places such as hospitals that require 24-hour coverage through holidays. Each employee is assigned a certain number of points for the year to use in holiday auctions. A worker who bids high for Christmas Eve off will get it, but has fewer points left to compete for Thanksgiving and New Year’s.

The common factor in all of these examples is the lack of a monetary profit motive. The institutions that hold the goods or vacation days simply want to get them into the places where they are most needed, but determining that on any given day is difficult. A market, even with fake money, prices products accurately for the moment, and then changes those prices quickly as needs change. The highest price is a good reflection of the highest need, even when values fluctuate constantly. The goal is to find an allocation that is efficient and fair—it’s not to profit from the scarce resources. 

Prendergast says fake-money markets could even be further applied to the broader food-bank universe. Fake-money credit cards could help mitigate discrepancies in the quality of food offerings around a city. For example, the Chicago Food Depository, which sources food for area food banks much as Feeding America does nationally, would load the most points on cards for members that don’t attract high-quality donations from wealthy neighbors. The food banks would use the cards to shop at the depository’s warehouses. And even if the money involved is fake, the impact would be real.