The Economics of Organ Donation

One of Greg Mankiw’s Ten Principles is that people respond to incentives. It always amazes us that policy makers overlook this simply concept. 

Getting people to sign organ donation card or even to donate blood has always been problematic and it may be a result of a lack of incentive. A recent study published by Knowledge@Wharton – the business school at the University of Pennsylvania – offers a solution to the dearth of organ donors. 

According to the study, there are currently 110,000 Americans on the wait list for organs yet only 40% of eligible Americans sign organ donor cards. In two of the three most populous states, New York and Texas, opt-in rates are just 7% and 10%. 

We understand that there is a thriving black market in organs. In that market, money serves as the incentive. Most people are born with two functioning kidneys though the body can function with only one. Thus, unlike most organs, donating a kidney won’t kill you. For some people, the cost of donating a kidney is less than the benefit (price) being offered in the black market. We don’t advocate an open market for organs, but not for ethical reasons. Our objection is based on economic reasons. The market is plagued by asymmetric information leading to both adverse selection and moral hazard problems. We are, however, in favour of compensation for blood donors. (No, two cookies and a glass of orange juice doesn’t cut it) 

The Wharton article explains an experiment done by Judd Kesler from Wharton and Alvin Rosh from Harvard. The experiment looked at the decision to donate organs. Instead of describing the choice in terms of organs however, the researchers used generic commodities. This removes any ethical bias from the experiment. A full description can be found in the Wharton article. 

The result of the experiment shouldn’t be a surprise to anyone. When given an incentive to voluntarily donate a commodity, the number of participants willing to agree to be donors increased significantly. The incentive was fairly simple. When it came time to decide who was to receive an organ, patients that were registered organ donors went to the top of the list. Patients who were willing to give up their organs upon death had a greater probability of receiving organs should they require them. 

Public policy makers need to recognize the powerful effects that incentives play in the allocation of scarce resources.

Babies are Normal Goods

When income rises, the demand for most goods increases, and when income falls, consumers buy less. Economists call these ‘normal’ goods. There are some goods, however, where purchases change in the opposite direction of income. Classic examples of ‘inferior’ goods are macaroni and cheese, used cars and public transit.

A recent study by the Pew Research Centre and reported in the Globe and Mail looked at the effect of income, GDP, unemployment rates and claims for jobless benefits on fertility rates in women aged 15-44. Using births per 1000 women as their dependent variable, the researchers found a significant positive correlation with income and GDP. After GDP fell during the recession of 2007-2008, fertility rates fell from 2008-2009. The suggestion is that the decline in income made women decide not to conceive and that reduced the number of births 9 months later.

The study was conducted in the U.S. and the results were more pronounced for Hispanics and blacks who suffered greater unemployment than did whites. The researchers also found that the effect was more prevalent in states that were hit hardest by the recession, and occurred later in states that went into recession later.

Evidence from previous recessions tends to indicate the fertility rates recover after the recession is over. What we are witnessing is an intertemporal substitution effect. Women are still having children, but they are postponing pregnancy when incomes fall. Not surprisingly, the effect of income changes decreased with age. There was no appreciable effect on women age 40-44 where the intertemporal choice is constrained by menopause.

The evidence suggests that births rise and fall with income and we must therefore conclude that babies are normal goods.