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An Inconvenient Truth: Helping Others Sometimes Hurts Them

C. W. Von Bergen & Martin S. Bressler

Southeastern Oklahoma State University

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Abstract

Despite recent calls for increased levels of helping the needy and underprivileged, benevolence

in the form of aid, favors, or other pro-social behaviors may have downsides and adaptive costs

that come with very real losses that are frequently overlooked. This is often due to kindness

which, over time, frequently results in aid recipients’ entitlement and dependency that often

worsen the very concerns that were meant to be alleviated by the assistance provided in the first

place. Thus, it is important not to allow peoples’ honorable intentions in helping others blind

individuals to the fact that real injury may be done—not the good envisioned. Examples of the

corrosive effects of help are discussed in a variety of fields. Having “skin in the game” and

providing autonomy-oriented help as practiced by Habitat for Humanity is offered as a possible

antidote to these destructive effects.

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An Inconvenient Truth: Helping Others Sometimes Hurts Them

A boy spent hours watching a caterpillar struggling to emerge from its cocoon.It managed to make a small hole, but its body was too large to get through. After a long struggle, it appeared to be exhausted and remained absolutely still. The boy decided to help the caterpillar and with a pair of scissors he cut open the cocoon, thus releasing it. The caterpillar fell to the ground but its body was very small and wrinkled and its wings were all crumpled. The boy continued to watch hoping that at any moment it would open its wings and fly away. But nothing happened; in fact, the butterfly spent the rest of its very brief life dragging around its shrunken body and shriveled wings, incapable of flight.

—Adapted from Bliss and Burgess (2012)

Wondering what happened, the boy’s mother took him to a local university and learned

that the caterpillar was supposed to struggle as a way of acquiring its wings and to achieve its

destiny to become a butterfly. In fact, they were told, the caterpillar’s struggle to push its way

through the tiny opening of the cocoon drives the fluid out of its body and into its wings.

Without the struggle, the caterpillar would never, ever fly because squeezing out of that small

hole was Nature’s way of preparing its wings for flight. Despite the boy’s kindness and his

eagerness to help, his good wishes and virtuous behavior actually irreparably damaged the

caterpillar and the boy innocently killed that which he was trying to help.

Like the butterfly struggling to emerge from its cocoon, individuals’ efforts for self-

sufficiency and development can be short-circuited by compassionate intervention. This can

happen when aid weakens the incentives for individuals to help themselves which leads aid

recipients to be in or remain in a condition requiring assistance (Ellerman, 2004; Gronemeyer,

1992). Over time help becomes a reward for staying in the state of needing aid and creating

dependency, entitlement, loss of personal initiative, eroding work ethic, and learned helplessness

(Murray, 1984). In some cases receiving help may threaten people’s personal self-esteem

because it can imply their inferiority relative to the helper (Nadler, 1991, 1998; Nadler & Fisher,

1986; Nadler, Fisher, & Ben-Itzhak, 1983), while also undermining their confidence and

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motivation to succeed (Fisher, Nadler, & Whitcher-Alagna, 1982). Offering assistance may

generate seriously negative effects in aid recipients including loss of self-reliance, feelings of

discomfort and obligation, decrements in social status, and derogations of the donor and the aid

received (Fisher, DePaulo, & Nadler, 1981). Like in the opening vignette, sometimes providing

aid, even with the best of aims, can be problematic.

Our goal is to open up perspectives as much as analyzing facts and to bridge the chasm

between the rhetoric and the reality of aiding the needy. We recognize that those who question

benevolence will not win many popularity contests and in some ways we feel somewhat

uncomfortable by suggesting that helping others may actually hurt them. In part this is because in

U.S. culture giving and providing aid are often viewed as monolithically positive, nearly sacred

qualities beyond reproach with negligible tradeoffs, whether or not the assistance is genuinely

beneficial (Oakley, Knafo, & McGrath, 2012). “It’s the thought that counts,” as the saying goes,

when discounting negative consequences of giving, assisting, and helping the less fortunate.

We are not trying to discount the importance of donating or providing aid to others but to

address those who have extolled its value without realistically considering when such actions

contain the potential for harm. Our aim is to foster more productive patterns of giving. The major

implication of this review is not a call for a reduction of aid, help, and care but rather an appeal

for rethinking strategies for assisting others and to shift frames of reference to include the

possibility that giving to and helping others may inflict costs. Sometimes help is truly facilitating

and at times, particularly in the long-run and if repeatedly provided, it contributes to inadvertent

injury mainly due to the detrimental effects of entitlement dependency, and narcissism which

appear to be increasing in U.S. society (Twenge & Campbell, 2009). Over time individuals

receiving such aid often become inveterate takers. Accordingly, the scope of this paper is limited

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to sustained, long term help to the needy rather than lifesaving help in times of catastrophe.

Igneski (2008) argues that the duty to rescue is a special type of obligation to aid and not the

toxic generosity that often evolves with prolonged, repeated assistance.

The morally tidy narrative that aiding others is an unmitigated good and lack of

assistance is unequivocally bad must receive a more nuanced assessment. Again and again, one

finds benevolent aid being defended as “doing good” in the sense of delivering resources to the

needy without any real recognition as to how it can undercut and weaken incentives for

developing self-reliance and autonomy—key American values (Baker, 2014)—in aid recipients.

Hence, this review aims to encourage a thoughtful consideration of the possibility that

giving, helping, and assisting, unless temporary and not endlessly repeated, will tend to

undermine individuals’ capacity for helping themselves and destroy personal initiative. Lupton

(2011) voiced such a concern when he said that “Giving to those in need what they could be

gaining from their own initiative may well be the kindest way to destroy people” (p. 69). Indeed,

“most external help actually overrides or undercuts the budding capacity for self-help and thus

ends up being unhelpful” (Ellerman, 2007, p. 562).

We define giving quite broadly to include prosocial attitudes, traits, and behaviors.

Behaviors themselves can range widely from informal support and care to formal giving

experiences such as volunteering. What each of these has in common is that they are all focused

on increasing others’ well-being (Konrath & Brown, 2013). In our analysis we explore the

dynamics of helping by first noting the increased calls for societal compassion, altruism, and

assistance. We then discuss how eleemosynary aid to relieve symptoms of maladies may create a

situation of moral hazard that weakens incentives and attenuates efforts for positive change to

eliminate such difficulties. Several areas where help may be hurting aid recipients are next

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presented as exemplars of assistance that highlight problematic aspects of giving and helping.

We then offer a model of helping based on individuals having “skin in the game” as exemplified

by Habitat for Humanity (n.d.). We conclude with a summary.

Calls for Help, Assistance, and Other Prosocial Behavior

Over the millennia moral philosophers, cultural pundits, and spiritual thinkers have

written positively about acts of charity, mercy, and kindness in the context of the ethic of

beneficence (Stanford Encyclopedia of Philosophy, 2013) and more recently within the ethics of

care (Gilligan, 1987). Some philosophers have asserted a moral obligation/duty to assist people

in need (Herman, 1996; Kant, 1969 [1785], Singer, 1972; Unger, 1996). Beneficent actions and

motives have traditionally occupied a central place in morality because they connote doing good.

Most ethical theory has embraced various aspects of beneficence, and utilitarian theorists see

generosity as the foundation for creating the greatest benefit for all. Common examples today are

found in social welfare programs, philanthropy, scholarships for needy and meritorious students,

disaster relief, programs to benefit children, the disabled, and the incompetent, and preferential

hiring and higher educational admission policies and practices.

More recently social scientists likewise have emphasized the importance of compassion

in social life and have called for increased demonstrations of altruism, giving, grace, and

prosocial acts toward those in need (e.g., Dutton, Workman, & Hardin, 2014; Frost, 1999; Fryer,

2013; George, 2014; A. Grant, 2013; K. Grant, 2008; MacAskill, 2015; Nussbaum, 2001; Post,

2003; Seppälä, 2015; Singer, 2015). Keltner (2008) goes a step further, arguing that humans have

evolved to be compassionate. Beneficence toward those less fortunate, assisting people in need,

demonstrating kindness to others, generosity, and trying to relieve individuals’ grief and misery

through help, aid, favors, and donations is often portrayed as one of society’s main moral duties

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(Salter, 2008). Indeed, some individuals find it disturbing to question the value of compassion,

altruism, charitable giving, and other prosocial behaviors and seem to suggest that these qualities

be revered without question (Center for Compassion, n.d.; Oakley, 2013).

Additionally, a global community of scholars, writers, specialists, and teachers interested

in demonstrating the well-being benefits of positive traits, states, and experiences has recently

emerged including the Greater Good Science Center at the University of California at Berkeley,

the Center for Compassion and Altruism Research and Education at Stanford University, the

Compassion Lab at the University of Michigan, the Centre for Positive Psychology at the

University of Melbourne, the Well-Being Institute at Cambridge University, The Centre for

Effective Altruism at Oxford, and the Optentia Research Programme in South Africa. Such

groups have promoted increased giving, helping, and compassion (e.g., Fryer, 2013) and find it

disturbing to question the value of compassion, altruism, and charitable giving, and seem to

suggest that these qualities be revered without question (Center for Compassion, n.d.; Oakley,

2013).

The appeals of such institutes are aimed at ultimately increasing “helping behaviors”,

“caring behaviors”, and “altruism” (Brief & Motowidlo, 1986) that commonly includes kindness,

generosity, nurturance, care, altruistic love, compassion, and “niceness” demonstrated by doing

favors for others, helping them, and taking care of them (Armstrong, 2010; Park & Peterson,

2006; Park, Peterson & Seligman, 2004; Peterson, 2006). Nadler (2002) suggests that helping

others is a positively valued behavior in most, if not all, human societies, and is said to flow

directly from our common sense of community and dignity.

Moreover, the work of such researchers and practitioners, as they attend to big and small

suffering, has overwhelmingly concentrated on persons who provide help rather than persons

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who receive it. Comparatively little research has been devoted to the effect of aid on recipients

(for an exception, see Nadler, 2015). It is often assumed that helping is constructive and

beneficial and that beneficiaries of aid are grateful for the help received (Fisher et al., 1981;

Zarri, 2013). These scientists have identified a host of ways in which charitable behavior can

lead to benefits for the giver, whether economically via tax breaks (Clotfelter, 1997; Reece &

Zieschang 1985), socially via signaling one’s wealth or status (Glazer & Konrad 1996;

Griskevicius et al., 2007) or psychologically via experiencing well-being from helping

(Andreoni, 1990; Dunn, Aknin, & Norton, 2008; A. Grant, 2013; Post, 2011). Coming from a

different perspective, researchers have also examined the costs (e.g., compassion fatigue;

burnout) of helping and caring on aid providers who assist the needy and the traumatized (Flynn,

2003; Portnoy, 2011).

Hidden Costs of Helping

The focus on positive effects on donors of helping others has obscured problematic

effects of prosocial elements on aid receivers because oftentimes such programs are designed

and implemented with little awareness that helping may have detrimental effects (Corbett &

Fikkert, 2014; Nadler, Fisher, & Streufert, 1976); that is, well-meaning initiatives wind up

hurting the parties they were designed to help because people have little understanding of the

negative impact of their good deeds. Other studies have noted that receiving social support has

been associated with increased depression, feelings of guilt, and feelings of dependency in

correlational studies (Liang, Krause, & Bennett, 2001; Lu, 1997; Lu & Argyle, 1992).

Furthermore, in a 5-year longitudinal study that controlled for a number of potential alternative

explanations (e.g. age, gender, physical health, health risk behaviors, personality traits), there

was a 30% increase in mortality for individuals who reported receiving practical support from

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friends and family members at the beginning of the study (Brown, Nesse, Vinokur, & Smith,

2003).

Many such efforts have undoubtedly been motivated, in part, by noble intentions and a

sincere desire to help those thought to be underprivileged. Nevertheless, helping may not be

constructive because of the very old idea that the best form of assistance is to help people help

themselves. Most are familiar with the ancient Chinese saying that if people are given a fish, they

are fed for a day, but if they are taught how to fish they can feed themselves for a lifetime

(Alvarez & van Leeuwen, 2011; Ellerman, 2005; Nadler, Halabi, Harpaz-Gorodeisky, 2009).

Giving people fish is a temporary palliative that in the absence of meaningful behavior on the

recipient’s part is likely to impede rather than promote their growth and development.

More recently, Nadler’s model of intergroup helping, (Nadler, 1997, 1998, 2002; Nadler

& Halabi, 2006) distinguishes between autonomy-oriented and dependency-oriented help.

Dependency-oriented help provides a full solution to the problem, is less concerned with the

recipient’s autonomy, and reflects the helper’s view that the needy cannot help themselves. In

contrast, autonomy-oriented help is partial and temporary, it is aimed at empowering the

disadvantaged and assumes that, given the appropriate tools, recipients can help themselves and

live autonomous independent lives (Igneski, 2008). Similarly, Dewey and Tufts (1908) indicated

that “The best kind of help to others, whenever possible, is indirect, and consists in such

modifications of the conditions of life, of the general level of subsistence, as enables them

independently to help themselves” (p. 350). These perspectives do not entail an obligation to

make people as happy as possible but a concern about providing persons with the tools they need

to make themselves happy. Thus, providing instrumental autonomy-oriented help is advised for

long term constructive recipient behavior.

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Ongoing help, however, may cause unintentional harm because of unwholesome

dynamics and pathologies that fester under the cover of kindheartedness. The point is not to

oppose these activities but to point out how benevolence often operates in the longer term to

erode the aid recipients’ incentives to help themselves—thus creating dependency relationships

and unhelpful help or, in the words of Ellerman (2005), “Charity corrupts; long-term charity

corrupts long term” (p. 12). Such long-term aid, instead of enabling self-help, creates a perverse

dependency-creating alternative to self-help. This happens despite helping activities often being

perceived as reflecting good intentions. Noble motives, however, do not always translate into

valuable outcomes. Smith (2008) cautions against judging by intentions alone with a dramatic

example: “Hitler and his Nazi Party firmly believed that they were helping all mankind [sic] by

killing all Jews, Slavs, gypsies, and homosexuals so as to ‘purify the Aryan race’” (p. 11).

Additionally, recent research indicates that virtues across a wide number of domains can

wreak havoc in the long-run and at high levels can have antithetical consequences on well-being

and/or performance (Breeden, 2013). In many areas one finds that seemingly virtuous behavior

may be problematic. Grant and Schwartz (2011), for example, document the deleterious effects

of such honorable virtues as gratitude, forgiveness, hope, caring, kindness, generosity,

volunteering, and empathy. In a particularly poignant medical example Groopman (2007) failed

to diagnose a life-threatening infection in a hospitalized cancer patient because his empathy for

the patient’s discomfort in the face of grueling chemotherapy induced him not to ask his patient

to roll over and be examined for bedsores—thereby hastening his patient’s death. Thus, to say

that helping is an absolute good may simply be painting with too broad a brush and that attempts

to assist others sometimes come with impairments and can have tradeoffs that worsen the very

concerns that were meant to be eased.

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Accordingly, in determining whether aid of any given type is beneficial, individuals (and

governments) must consider whether it is likely to significantly increase the number and worsen

the condition of beneficiaries of aid. All too often heartfelt efforts to help are in reality salving

people’s own consciences without fully examining the impact on those they seek to help. In a

culture such as the U.S. that places high value on kindness, empathy, charity, and altruism and

for those who treat these concepts as sacred such views may cognitively blind individuals to its

harms (Haidt, 2013). Without approaching kindness interpreted as helping others with a healthy

dose of mindfulness (e.g., Davis & Hayes, 2011), individuals often become blind to the ways

such a virtue can sometimes hurt people. These individuals may be inclined to believe that if

there are negative effects of helping then surely it is an aberration. Rather than being an anomaly,

however, helping can be problematic because of the well-known phenomenon called moral

hazard.

Moral Hazard

Broadly speaking, moral hazard occurs when one party has a tendency or incentive to

behave inappropriately; i.e., people who have a reasonable expectation of altruists assisting them

in case of need often alter their own behavior to shift the costs of preventing needs onto altruists

(Browne & Hoyt, 2000; Einav, Finkelstein, Ryan, Schrimpf, & Cullen, 2013; Schwarze &

Wagner, 2004). Moral hazard, sometimes referred to as charity hazard (Browne & Hoyt, 2000)

or disaster syndrome (Kunreuther, 2000), posits a downside to private or public help or aid

because recipients may begin to rely on free aid and others’ assistance, instead of their own

efforts. Essentially, the anticipation of aid crowds out self-protective activities because

individuals do not take appropriate action to help themselves because of expected governmental

or private assistance.

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A system whereby relief or aid is given to the worst off may create moral hazard because

people or institutions receiving help for being worst off have less incentive to improve. Moral

hazard problems arise whenever individuals’ behavior is affected because they are protected

from the consequences of their actions. Moral hazards are encountered every day: tenured

professors have secure jobs and poor teaching or research have little or no career consequences;

people with auto theft insurance are less vigilant about where they park; salaried salespeople take

long breaks, and so on.

The Samaritan’s dilemma

A specific example of a moral hazard is the Samaritan’s dilemma derived from the

Biblical story of the “Good Samaritan” (Luke 10:29-37, New International Version). In traveling

from Jerusalem to Jericho, the Samaritan (the altruist) assisted a person who had been robbed

and beaten by thieves. Under the circumstances of this event, the Samaritan is properly lauded

for his exemplary conduct. However, an unintended consequence of such generosity is that it

may induce adverse behavior of other potential aid recipients. Buchanan (1975) illustrated that if

the Samaritan decides to assist more unlucky travelers, other journeyers would likely take less

care to avoid thieves and other hazards.

In short, the Samaritan’s dilemma arises whenever the extension of aid increases the

number of situations requiring aid. Thus, the Samaritan’s dilemma is a pervasive problem as

people respond to those in “need.” Buchanan (1975) indicated that “we may simply be too

compassionate for our own well-being or for that of an orderly and productive free society” (p.

71) and that such altruism, if left unchecked, would have catastrophic consequences for the

human race as a whole.

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Interestingly, even thinking about help from others goals can have adverse consequences.

For example Fitzsimons and Finkel (2011) randomly assigned American women who cared a

great deal about their health and fitness to think about how their spouse was helpful, either with

their health and fitness goals or for their career goals (control group). Women who thought about

how their spouse was helpful with their health and fitness goals became less motivated to work

hard to pursue those goals. Relative to the control group, these women planned to spend one-

third less time in the coming week pursuing their goals. This research illustrated what Fitzsimons

and Finkel (2011) call “self-regulatory outsourcing” (p. 369) in which considering how others

can be helpful for a given goal undermines motivation to expend effort on that goal. It seems that

when people think about how someone else can help them, they unconsciously “outsource” effort

to their prospective helper, relying on them for future goal progress, and, consequently, exerting

less effort themselves.

Should an individual permit a neighbor readily to borrow groceries or tools if this is

likely to encourage the neighbor to be in chronic need of assistance in the future (Wagner,

1989)? Does extending an unemployment benefit create an incentive not to work, or is it the

humane thing to do in a harsh job market? Does a potential aid recipient increase his or her risk

of becoming impoverished because they know that a benevolent government will step in to

provide relief? Such helping, gifting, or assisting can over time be problematic because it may

create a moral hazard. We now present several scenarios where helping is toxic because of moral

hazard. These settings are taken from a number of diverse areas and are presented to illustrate the

ubiquity of the phenomenon and are not intended to be exhaustive.

Where Helping May Be Hurting

The sometimes unforeseen misfortunes of assistance are explored here by examining

several areas where benevolence may be problematic for recipients of aid. In such areas—

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affirmative action, the Native American experience, home ownership, welfare, foreign aid,

inheritances and intergenerational transfers, and gambling—helping people (or organizations)

repeatedly in the short run may create pernicious effects that damage them in the long run. In

moral hazard terminology, such assistance over time diminishes incentives for the needy to

reduce risk and undertake agentic behavior because of the anticipation, indeed, expectation, that

help will be provided by others. That effects can change over time is not a new concept.

Rousseau’s analysis in Book I and II of Emile described the change in causality in children

crying: “The first tears of children are prayers. If one is not careful, they soon become orders.

Children begin by getting themselves assisted; they end by getting themselves served” (1979

[1762], p. 66). More recently Lupton (2011) noted the following progression: giving once elicits

appreciation; giving twice creates anticipation; giving three times generates expectations; giving

four times produces entitlement; and giving five times establishes dependency.

Affirmative action

To level the playing field for job applicants or employees and to demonstrate support for

equal opportunity organizations around the globe have implemented affirmative action plans

(AAPs) which are policies designed to improve work and educational outcomes for

underrepresented groups by providing them with extra help (Sowell, 2005; Yang, D’Souza,

Bapat, & Colarelli, 2006). AAPs are designed to facilitate a transition to more equal relations

between ethnic and racial groups and to assist the less advantaged to realize their potential and

attain equality, and thus help promote organizational and institutional diversity and redress

societal injustice (Turner, Pratkanis, & Hardaway, 1991). It is perhaps the most important

antidiscrimination technique ever instituted in the United States and has had a demonstrable

effect on discrimination (Turner & Pratkanis, 1994).

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Nevertheless, AAPs are not without drawbacks. Although important in achieving such

goals, these programs have, nevertheless, been criticized as amplifying the targeted group’s

dependence and inferiority that is implied by reliance on another’s assistance (Nadler & Fisher,

1986; Riley, 2014).H This perpetuates rather than corrects social inequality (Niemann &

Dovidio, 2005; Pratkanis & Turner, 1996). These procedures can also stimulate backlash among

non-beneficiaries who may feel unfairly disadvantaged by these policies (Harrison, Kravitz,

Mayer, Leslie, & Lev-Arey, 2006; Shteynberg, Leslie, Knight, & Mayer, 2011). In addition,

AAPs can cause the very employees they are intended to benefit to be stigmatized as

incompetent by both others and the self (e.g., Heilman, 1994; Leslie, Mayer, & Kravitz, 2014).

Specifically, the presence of AAPs raise the possibility that members of the groups the

AAP targets were hired due to their demographics, not their qualifications. Scholars have

theorized that others therefore discount the possibility that AAP targets are competent (e.g.,

Garcia, Erskine, Hawn, & Casmay, 1981; Heilman, Block, & Lucas, 1992) and, in a parallel

fashion, that AAPs and the associated possibility that demographics played a role in selection

cause AAP targets to doubt their own self-competence (e.g., Heilman, Simon, & Repper, 1987;

Niemann & Dovidio, 2005). Perceived incompetence likely results in poor performance

outcomes (e.g., Heilman & Alcott, 2001) leading Steele (1990) to indicate that “…Preferential

treatment, no matter how justified in the light of day, subjects blacks to a midnight of self-doubt,

and so often transforms their advantage into a revolving door (pp. 117-118). Programs awarding

preference according to race or sex are also opposed on the grounds that they cause much more

harm than good because such preferential treatment programs encourage dependency and reward

people for identifying themselves as victims providing them no incentives to become self-reliant

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or to develop the skills necessary to succeed in the work place or classroom (Eastland & Bennett,

1979; Howard & Hammond, 1985).

Affirmative action in higher education, intended to address past discrimination, has

resulted in fewer black college graduates—particularly in the fields of math and science—that

were experienced in the absence of racial preferences (Riley, 2014). Similarly, Sander and

Taylor (2012) argue that race-based admissions preferences for minority students lead to

“mismatch” between students and universities. As a result of race-based preferences, students are

admitted to more selective schools than they otherwise would be based on their academic

credentials alone. Once enrolled at these more prestigious schools, the students fall behind and

are less likely to finish. This “mismatch” effect, the authors contend, then cascades down all tiers

of higher education, with the harmful effects becoming more pronounced at each successive tier.

Such AAPs reinforce ugly stereotypes of, for example, black inferiority and the

pernicious notion that blacks are not academically talented which causes significant long-term

harm. Affirmative action policies that initially said people must be judged without regard to race

and sex evolved into policies that required the consideration of those characteristics leading

Thomas Sowell, an American economist, social theorist, political philosopher to state, “I simply

do not see the justice in making people who are badly off worse off, in the name of advancing

them” (1983; see also Sowell, 2005).

In summary, to the extent that AAPs and the associated stigma of incompetence limit

targets’ performance, AAPs may have the opposite of their intended impact. Thus, the

benevolent intention that underlies affirmative action programs may be misconstrued and lead to

increased tensions between the advantaged group that initiated them and the disadvantaged

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groups which are its intended beneficiaries. The charitable intentions directed towards one

particular disadvantaged U.S. population segment, Native Americans, are now presented.

The Native American experience

In a highly controversial story, journalist John Stossel reported that Native Americans

have been “helped” by the government more than any other group, yet struggles more than any

other group. Stossel (2011) reported that almost 25% of Native Americans live in poverty and

66% are born to single mothers. On some reservations, the poverty rate is 50% and higher. This,

despite almost $13 billion spent across 20 federal government programs every year. On the other

hand, Stossel points to examples of successful Native Americans not living on the reservation

outperforming Natives living on reservations.

Increasing welfare payments may actually increase poverty levels. A study by Guedel

(2014) of two dozen Native American gaming tribes located in the states of Washington, Oregon,

Idaho, and Alaska found that growing tribal gaming revenues can make poverty worse. Between

2000 and 2010 casinos owned by those tribes doubled their total annual take in real terms to $2.7

billion. From an economic perspective, it would seem reasonable to expect the infusion of new

capital provided by tribal gaming to be a catalyst for poverty reduction, and likewise expect to

see the individual and collective poverty percentages for tribes decrease. On a collective basis,

the actual results for these northwestern tribes demonstrated the opposite: an inverse correlation

between per capita payments (in which tribes distribute casino profits directly to tribal members)

and poverty reduction. Of the 17 tribes in the study that dispersed cash from casinos directly to

members, ten (58.8%) saw their poverty rates rise. Of the seven tribes that did not provide per

capita payments to members, only two saw a poverty increase. In tribes with high unemployment

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and poverty, per capita payments are often viewed as a means of collective support by and for

tribal members, with each member eligible for an equal share of tribal wealth.

It appears that per capita payments for poverty reduction in Native American

communities—which some have likened to a welfare-type system—provided a disincentive for

work and dissipated tribal economic resources that could be better used to finance strategic

initiatives such as scholarships for higher education (McGee, 2013). Indeed, Native American

Ron Whitener, law professor, tribal judge, and a member of the Squaxin Island Tribe indicated:

“These [per capita] payments can be destructive because the more generous they become, the

more people fall into the trap of not working” (Payne, 2015).

Home ownership

More recently, well-meaning governmental policies to enact the American Dream of

homeownership in the 1990s and early 2000s allowed less-than-qualified individuals to receive

housing loans and encouraged more-qualified buyers to overextend themselves. Typical risk-

reward considerations were disregarded because of implicit government support (Acharya,

Richardson, van Nieuwerburgh, & White, 2011). As a result, homeownership for such

historically “underserved” borrowers increased significantly; yet when economic conditions

deteriorated, many lost their homes or found themselves with properties worth far less than they

originally had paid, and taxpayers were left with trillion-dollar costs and a prolonged economic

crisis.

Essentially, with the noblest of purposes, a permissive lending environment was created

in which people were given too much money to buy houses they could not afford, resulting in

catastrophic damage. The good intentions inherent in such “feel good,” emotionally-based

practices frequently follow short-term, superficial heuristics for helping others that are often

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implemented without a critical, in-depth analysis of costs. An initial snap, common-sense

judgment about what seems right in helping others can gel quickly into formidable certitude

without consideration of important relevant facts. An awareness of the insidious effects of giving

and helping could have facilitated better regulation in order to mitigate its costs and enhance its

benefits. There may have been significant advantages for all U.S. citizens if some had been told

“no.”

Welfare: Individual and corporate welfare

Welfare for individuals. Sometimes there are detrimental long-term effects on American

families because of many well-intentioned welfare programs (Funiciello, 1993; Voegeli, 2010).

This appears to be a long-lasting issue and is endemic in government programs to assist the poor.

Hazlitt (1971), for example, describes two lessons that can be drawn from the effects of welfare

in ancient Rome: “The first is that once the dole or similar relief programs are introduced, they

seem almost inevitably to get out of hand. The second lesson is that once this happens, the poor

become more numerous and worse off than they were before, not only because they have lost

self-reliance, but because the sources of wealth and production on which they depended for

either doles or jobs are diminished or destroyed” (p. 219). In short, in collectively assisting the

needy through government handouts, the number of the poor increased because work incentives

were adversely affected.

As a more recent example, consider that Congress initiated cuts in welfare by passing

The 1996 Welfare Reform Law (also known as The Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 [PRWORA]) amid predictions that it would result in

substantial increases in destitution, hunger, and other social ills. For example, Senator Daniel

Patrick Moynihan (D-NY) proclaimed the new law to be “the most brutal act of social policy

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since reconstruction” (Huffington, 1996). He predicted, “Those involved will take this disgrace

to their graves” (Welfare as They Know It, 2001, p. A14). However, in a six year evaluation of

this welfare reform law Rector and Fagan (2003) noted that overall poverty, child poverty,

poverty of single mothers, and child hunger declined substantially. Employment of single

mothers increased dramatically, and welfare rolls plummeted. The share of children living in

single-mother families fell, and the share of children living in married-couple families grew,

especially among black families. Pardue (2003) observed that black child poverty declined from

41.5% to 30% in this six year period—the biggest decline in recorded history. Cutting welfare

payments, led to decreased levels of poverty suggesting that the government had induced

otherwise able-bodied people to become dependent on welfare.

Interestingly, PRWORA also cut eligibility to Medicaid for noncitizen immigrants.

Borjas (2003) found, contrary to expectations, that health insurance coverage among noncitizen

immigrants increased after their eligibility for Medicaid was reduced—an effect that could not

be explained by the robust economy of the 1990s. Borjas argued that affected immigrants

increased their work effort and found jobs with health benefits.

We are in agreement with U.S. founding father, Benjamin Franklin who said some 250

years ago: “I am for doing good to the poor, but I differ in opinion of the means. I think the best

way of doing good to the poor, is not making them easy in poverty, but leading or driving them

out of it. In my youth I travelled much, and I observed in different countries, that the more public

provisions were made for the poor, the less they provided for themselves, and of course became

poorer. And, on the contrary, the less was done for them, the more they did for themselves, and

became richer” (Franklin, 1766).

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Corporate welfare. It makes sense to bail out bankrupt banks and avoid financial

meltdown in the economy, but if governments offer this guarantee then banks have a greater

incentive to take risks knowing they will get bailed out. Some hold that certain financial

institutions are so large and so interconnected that their failure would be disastrous to the

economy—and they therefore must be supported by government when they face difficulty. The

colloquial term “too big to fail” has been used to describe this situation (Lin, 2010). By declaring

a company too big to fail means that the government or central bank may step in and help these

institutions if they get into financial trouble.

Financial bailouts of lending institutions by governments, central banks or other

institutions can encourage risky lending in the future if those that take the risks come to believe

that they will not have to carry the full burden of potential losses. Lending institutions need to

take risks by making loans, and usually the most risky loans have the potential for making the

highest return. So-called “too big to fail” lending institutions can make risky loans that will pay

handsomely if the investment turns out well but be bailed out by the taxpayer if the investment

turns out badly.

Taxpayers, depositors, and other creditors often have to shoulder at least part of the

burden of risky financial decisions made by lending institutions (Wilson, 2009). According to the

World Bank, of the nearly 100 banking crises that have occurred internationally from 1980 to

2000, all were resolved by bailouts at taxpayer expense (Boyd, Gomis, Kwak, & Smith, 2000).

As former Federal Reserve Bank chairperson, Ben Bernanke (2010), indicated, “If

creditors believe that an institution will not be allowed to fail, they will not demand as much

compensation for risks as they otherwise would, thus weakening market discipline; nor will they

invest as many resources in monitoring the firm’s risk-taking. As a result, too-big-to-fail firms

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will tend to take more risk than desirable, in the expectation that they will receive assistance if

their bets go bad.”

While government bailouts or intervention might help a company survive (e.g., Chrysler),

some opponents believe it is counterproductive to help companies that deliberately take high-risk

high-return positions because they are able to leverage these risks based on the governmental

policy preferences they receive (Drew, 2009; Gup, 2003). Some critics, such as former Federal

Reserve chair, Alan Greenspan, believe that such large organizations should be deliberately

broken up: “If they’re too big to fail, they’re too big” (McKee & Lanman, 2009). More than fifty

prominent economists, financial experts, bankers, finance industry groups, and banks themselves

have called for breaking up large banks into smaller institutions (The Big Picture, 2013).

Relatedly, Suarez (1994) showed that the threat of being closed can be seen as “an effective way

to induce the bank to be prudent when the present value of its future rents is sufficiently high” (p.

24) from which he infers that the optimal strategy for a central bank is to commit credibly to

withdrawing the bank’s charter in case of bankruptcy. It appears that when people and firms are

protected from the consequences of their behavior then bad things often happen.

Foreign aid

Foreign aid has often presented more challenges than opportunities to aid-receiving

countries (Ear, 2013; Kennedy, 2004). There have been small improvements across the globe,

from reducing poverty to slowing population growth to curing and preventing diseases, but the

impact from aid has not been proportionate to the amount of money donated.

Foreign aid’s biggest downside is that frequently there is no clear, effective system put in

place to hold aid recipients and their governments accountable for resources illegally taken from

public sector coffers—a long-standing, and still very present, trend from Asia to Africa to Latin

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America/Caribbean to Europe. Unfortunately, the absence of that system reinforces social

inequities and perpetuates cycles of political abuse that has led to a sophisticated new form of

authoritarianism—one that empowers the elite few, while keeping a majority of people in abject

poverty. Some 30 years ago Bovard (1986) argued convincingly that the success of foreign aid is

often measured by intentions, not results. Using the U.S. as one example, Bovard (1986)

indicated that “[F]oreign aid has routinely failed to benefit the foreign poor…[and] the U.S.

Agency for International Development [USAID] has dotted the countryside with ‘white

elephants’…the biggest…of them all—a growing phalanx of corrupt, meddling, and overpaid

bureaucrats” (p. 1).

It seems that foreign aid might create perverse incentives and undermine the development

of sound institutions in the recipient countries in part because large amounts of aid delivered to

low-income countries with poor institutions and governance can create a cycle of aid dependence

where the recipient government begins to rely considerably on foreign sources to perform key

operational and fiscal tasks. Alternatively, it could refer to a situation where the recipient

government is discouraged from expending any efforts towards inducing development because it

anticipates that foreign assistance is on the way. Indeed, foreign aid supplies large amounts of

unearned capital to governments in a windfall-type manner (Nager, 2013).

Such behavior is essentially motivated by the fact that recipient governments continue to

receive development assistance even if they have made no concerted efforts to effectively utilize

received funds. In fact, such guarantees can potentially induce ‘moral hazard’ behavior on the

part of recipient governments, where they may pursue unproductive policies that are more likely

to encourage agencies to continue funding. For example, the anticipation of charity in the case of

a large-scale disaster might prompt governments to diminish protection (Buchanan, 1975; Coate,

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1995) since “… current decisions of economic agents depend in part upon their expectations of

future policy actions” (Kydland & Prescott, 1977, p. 474).

Even the World Bank has conceded that in countries with weak institutions, “the Bank’s

interventions may have delayed the development of effective, self-reliant cadres and institutions”

(Kapur, Lewis, & Webb, 1997, volume 1, p. 421). The essential problem with this intervention is

that there are no consequences associated with poor efforts from the recipient government. As a

result of this phenomenon, beneficiary governments have weak incentives to efficiently utilize

received funds, and generate sustainable development.

In the recipient country, aid dependence can impact institutions by weakening

institutional capacity, siphoning off scarce talent from the bureaucracy, diminishing

accountability, encouraging rent seeking and corruption, fomenting conflict over control of aid

funds, and alleviating pressures to reform inefficient policies and institutions. For instance, a

resident of Equatorial Guinea described his country’s neglect of facility maintenance:

“Everything is given to them; they don’t take care of anything and don’t have to” (Klitgaard,

1990, p. 98). When vulnerable groups are exposed to the international relief system, the end

result may be the wholesale destruction of a culture. Despite over $2 trillion provided to Africa

over the last 50 years, former World Bank consultant Dambisa Moyo, a native of Zambia,

indicated such aid has resulted in measurably worsened outcomes in a broad variety of areas,

supporting despotism and increasing corruption and a sense of dependency in Africans (Moyo,

2009).

The idea that foreign aid often hurts, rather than helps, poor people in poor countries was

observed by economist and 2015 Nobel prize winner, Angus Deaton. Deaton (e.g., 2013)

observed that in order to have the funding to run a country, a government needs to collect taxes

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from its people. Since the people ultimately hold the purse strings, they have a certain amount of

control over their government. If leaders do not deliver the basic services they promise, the

people have the power to remove them. Foreign aid (especially to countries where they get an

enormous amount of aid relative to everything else in that country) can weaken this connection

and change the relationship between a government and its people, leaving a government less

accountable to its people, the congress, or parliament. Governments that get much of their money

from aid do not have to be answerable to their constituents and consequently makes them more

despotic. It can also increase the risk of civil war, since there is less power sharing, as well as a

lucrative prize worth fighting for. All this leads to corrosive effects and general economic

decline as Deaton has observed in countries as Zaire, Rwanda, Ethiopia, Somalia, and Biafra.

[To be fair, Deaton believes that certain types of health aid— offering vaccinations, or

developing cheap and effective drugs to treat malaria, for example—have been hugely beneficial

to developing countries.] Consistent with this analysis, Rajan and Subramanian (2005) observed

that much foreign aid flowing into a country tended to be correlated with lower economic growth

and that countries that receive less aid tend to have higher growth, while those that receive more

aid have lower growth.

Another perspective also finds that aid may negatively impact countries. It seems that

reductions in foreign aid, while initially difficult, may over the long run be beneficial. For

example, the end of U.S. aid—which had been generous in the 1950s—is often credited for the

Korean and Taiwanese economic turnarounds of the 1960s (Rodrik, 1996). Foreign aid, it seems,

has largely encouraged Third World governments and their populations to rely on hand-outs

instead of on themselves for development thus again demonstrating the corrosive effects of help.

Echoing this sentiment is one of the world’s best known philanthropists and rock band U2 lead

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singer, Bono, who said “Aid is just a stopgap. Commerce [and] entrepreneurial capitalism takes

more people out of poverty than aid. We need Africa to become an economic powerhouse”

(Theroux, 2013).

Inheritances and intergenerational transfers and gambling

Inheritances. That sudden, unearned wealth can have deleterious effects is well known.

Nearly every culture has some version of the axiom “from shirtsleeves to shirtsleeves in three

generations,” dating back to China over 2000 years ago. The proverb describes how the first

generation works hard to create a fortune; the second generation enjoys its spoils, substituting

hard work with entertainment, and the third generation—with no role model to follow—

squanders what remains of the fortune, relegating their children to starting the process over

again. Sullivan (2013), for example, found that 70% of an affluent family’s wealth is typically

gone by the end of the second generation, and 90% is destroyed by the end of the

third. Psychologists specializing in “sudden wealth syndrome” (Schorsch, 2012) acknowledge

that heirs, like lottery winners, tend to squander their sudden fortune.

Having been born into money, they may also expect that their financial support will

continue. The sense of cause and effect between management of their assets and returns is not

inherited; it must be developed. Thus, each new family owner must develop a sense of fiduciary

responsibility, an understanding of his or her role, a realistic expectation of return, an

understanding of risk, and be willing to be part of relevant decisions. A strong sense of

entitlement usually leads to unrealistic expectations and conflict with reality. Additionally, there

is frequently a lack of personally and socially beneficial purposes guiding the use of inherited

wealth. O’Neil (1997) documented how money transferred to heirs without a meaningful purpose

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leads to negative character qualities, such as the inability to delay gratification, unwillingness to

tolerate frustration, feelings of failure, and a false sense of entitlement.

Members of wealthy families are often concerned that their family wealth not “spoil”

their heirs (Dashew, 2002; Goldbart, Jaffe, & DiFuria, 2003) and that their children and

grandchildren will “end up lazy, good-for-nothings” (Baron & Lachenauer, 2014) who do not

contribute to society. Yet their children, growing up with such privilege find it difficult to

develop a sense of responsibility to work to expand the family’s portfolio, or even a sense that

such a task is worth doing. The family must find ways to develop values, personal responsibility,

and commitment with socially useful activities.

Commodore Cornelius Vanderbilt, for instance, did not allow his children to have access

to their inheritance. When he died in 1877, it is estimated that he was one of the richest men in

the world. As trustee, his oldest son decided it was their money and gave all the heirs direct

access to their inheritances (Jaffe & Lane, 2004). He, too, was one of the richest men in the

world at his death. “When 120 of the Commodore’s descendants gathered at Vanderbilt

University in 1973 for the first family reunion there was not a millionaire among them”

(Vanderbilt II, 1989, p. ix). It appeared that family members may have been raised to expect a

certain lifestyle that can quickly deplete a family’s wealth-producing assets.

Gambling and lottery winners. Government agencies routinely distribute large sums of

money in a windfall manner to those who purchase lottery tickets. In effect, lotteries constitute

large-scale non-contingent (i.e., independent of performance) processes that provide unearned

largesse (Doherty, Gerber, & Green, 2006). Individuals who obtain big winnings in various state

lotteries often suffer a ruinous set of circumstances. Individuals who win big time usually lose

big time too as the web of their social relationships is ripped apart by greed. Money is a form of

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power, and any time one’s power exceeds one’s understanding the result is chaos and

destruction. Persons who have wealth because they have earned it are not as likely to be harmed

by it because they were able to exercise the discipline and restraint needed in order to accumulate

capital in the first place. It is when big money falls into one’s lap (i.e., non-contingent) that real

problems are most likely to occur.

Lottery ticket winners do not necessarily end up wealthier. Many end up bankrupt or

broke within a short period of time. Hankins, Hoekstra, and Skiba (2011) found that more than

1,900 Florida lottery winners went bankrupt within five years, suggesting that lottery players

were twice as likely to file for bankruptcy as the general population. The study also found that

large lottery winners were less likely than small lottery winners to go bankrupt within the first

two years, but the odds of bankruptcy were equal after five. It was as if the additional funds just

postponed the inevitable. Even the Certified Financial Planner Board of Standards estimates that

nearly one third of lottery winners will become bankrupt.

Winnings in gambling may also be considered a windfall. Gambling can be seen as a way

of circumventing the principle that rewards should be achieved through work and it has at times

been looked upon as a threat to the work ethic (Binde, 2007; Cosgrave & Klassen, 2001). Insofar

as strong behavioral norms exist in society, emphasizing the virtues of earning one’s living

through employment as opposed to living in idleness, large lottery winnings might also be

viewed as representing a negative potential in that they encounter opportunities for withdrawal

from the labor market. Many gamblers constantly hope that, somehow, somewhere, their “ships

will come in” without much effort on their part.

Other areas

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Because of space limitations, we do not address additional areas that provide unearned

largesse resulting in detrimental effects in the long term. For example, codependence and

enabling (McGrath, & Oakley, 2012), unemployment benefits (Hagedorn, Karahan, Manovskii,

& Mitman, 2015), grade inflation (Felton & Koper, 2005), participation trophies (Merryman,

2013), natural resource curse (Haber & Menaldo, 2011), nursing home residents (Langer &

Rodin, 1976), and “helicopter” or “hovering” parenting (Schiffrin, Liss, Miles-McLean, Geary,

Erchull, & Tashner, 2014) have illustrated that helping can hurt.

A Model for Helping: Having Some “Skin in the Game”

The moral hazard literature early on recognized the tradeoff between full insurance and

optimal care-level incentives. The idea was simple: if the insured enjoyed only partial insurance

coverage, some incentive to take care would be preserved. The literature demonstrated that the

most efficient insurance contracts require some sharing of the loss between the insurer and the

insured (Shavell, 1979). And insurers do, in fact, commonly share losses with insureds in various

ways, including through deductibles, copayments, and other cost sharing methods (Kuperman,

2008; Pauly, 1968). Deductibles require insureds to pay a fixed amount “out of pocket” to cover

insured losses before the insurance coverage kicks in to cover insured losses thereafter.

Copayments typically require insureds to bear some fraction of each covered loss claim filed by

an insured.

Such cost-sharing strategies to reduce moral hazard are designed so that individuals have

some “skin in the game.” Several examples of having “skin in the game” have been offered over

the millennia. Hammurabi’s code, formulated nearly 4,000 years ago by the Babylonians,

specified: “If a builder builds a house for a man and does not make its construction firm, and the

house which he has built collapses and causes the death of the owner of the house, that builder

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shall be put to death” (Harper, 1904, p. 111). Other examples include the Roman heuristic that

engineers spend time sleeping under bridges they have built, to the maritime rule that the captain

should be last to leave the ship when there is a risk of sinking.

From these examples it is clear that the term, “skin in the game,” means having a

significant commitment, share, or interest in a venture or activity. ‘Game’ is a metaphor for

actions of all types, and ‘skin’ is a simile for being committed to something because of

emotional, financial, psychological, or physical investments in a cause of action. The phrase

implies being invested or involved in achieving an outcome. The thinking is that putting one’s

own precious resources at risk where one can potentially lose something (whether it is some

form of ownership, money, property, life, or respect) means that people have a greater stake in

the success of the venture and are incentivized to exercise care and limit irresponsible risk-

taking.

Those not having skin in the game have nothing to lose and therefore may more easily

walk away in large part because there are fewer negative consequences to them. When decision

makers have skin in the game—when they share in the costs and benefits of their decisions that

might affect others—they are more likely to make prudent decisions. Skin in the game is what is

sometimes called an equity investment. Equity investors are owners and owners value their

property. Equity investments do not have to be large to provide incentives that generate desirable

responses. Several areas where skin in the game is important are now provided.

Investing

Beginning in 2005, the Securities and Exchange Commission required fund manager

investment status to be filed under a statement of additional information. Beyond the symbolic

benefits of showing investors that a manager has some of his or her own money in the fund (i.e.,

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some skin in the game), there are real and measurable advantages to having the portfolio

manager in the investor pool. According to Morningstar, a well-regarded investment research

and investment management firm, the more money a portfolio manager invests in a fund, the

better the fund does (Benjamin, 2011). Of the funds at the highest manager investment level of

more than $1 million, the average star rating is 3.5 and the average manager tenure is more than

12 years. Conversely, in funds where the manager has no money invested, the average star rating

is 2.9 and the average tenure is 4.6 years.

In a recent study Kinnel (2015) looked at mutual fund manager investment levels in their

own funds as of 2009. He then looked at the performance of these actively-managed funds over

the next five years and then measured each fund’s success rate, which he defined as funds that

outperformed their investment category. The results showed that fund managers with a

significant amount of his or her personal money (> $1 million) in the fund to do better than one

with no investment at all. It is an extra incentive beyond keeping one’s job and getting more pay.

Higher education

The concept of skin in the game has also been applied to colleges and universities. For

example, some universities require that faculty pay the first $50 or $100 of the cost to attend an

academic conference. With this small fee, there are likely to be fewer requests to attend these

“valuable” conferences. Having the faculty put some equity into the process almost surely

reduces the number of boondoggle trips. In another education-related area Miller (2015) argues

that President Obama’s plan for free community college will reduce the value of a college

education while having an equity investment in higher education, even a small one, will provide

an incentive for students to make sound decisions. Which courses should they take? How much

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effort should they put into their coursework? Should they attend class and pay attention? Their

answers almost surely depend on whether they have equity in their education and how much.

More importantly, current federal incentives reward colleges and universities for volume

(number of students enrolled and associated loan and grant monies) yet federal policy has few, if

any, consequences for institutions that leave students with mountains of student debt and

defaulted loans. To assist these institutions in reducing excessive and unnecessary student

borrowing and debt Senator Lamar Alexander of Tennessee released a Congressional white

paper on March 23, 2015 that proposes giving colleges and universities some risk sharing (or

skin in the game) in which they would be held partially accountable for financial risks to students

and taxpayers (U.S. Senate Committee on Health, Education, Labor & Pensions, 2015). Under

these proposals, the risk of enrolling a student would be shared among all those who finance a

student’s education: the student, the federal government, and now, the institution. This would

ensure that colleges and universities have a clear financial stake in their students’ success, debt,

and ability to repay their taxpayer-subsidized student loans.

Current and historical commentary on skin-in-the-game concepts and proposals often

revolves around this idea. Former U.S. Secretary of Education Bill Bennett and coauthor, David

Wilezol, wrote that each college should pay “… a fee for every one of its students who defaults

on a student loan, or have a 10 to 20 percent equity stake in each loan that originates at its

school” (2013, p. 54). Similarly, The Economist (2014) indicated that “If [universities] were

made liable for a slice of unpaid student debts—say 10% or 20% of the total—they would have

more skin in the game.” Support for this comes from a variety of higher education observers

across the political spectrum from the right-of-center American Enterprise Institute and the U.S

Chamber of Commerce to the Institute for Higher Education Policy.

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This would ensure that colleges and universities have a clear financial stake in their

students’ success, debt, and ability to repay their taxpayer-subsidized student loans. It would

encourage colleges and universities to establish appropriate admissions’ practices for at-risk or

uncommitted students, motivate students to complete their degrees more quickly, and graduate

students with less debt. Recent legislation sponsored by Senators Reed (D-RI), Durbin (D-IL),

and Warren (D-MA) would expand this concept to some U.S. colleges that have high borrowing

rates and high student loan default rates (Protect Student Borrowers, 2013).

Mortgages

Every year, the U.S. Department of Housing and Urban Development, through its Federal

Housing Administration (FHA), insures billions of dollars in home mortgage loans made by

private lenders, very often with low down payments. FHA mortgage insurance helps homebuyers

with limited funds to obtain a home mortgage. Homebuyers with FHA-insured loans need to

make a 3 percent contribution toward the purchase of the property and may finance some of the

closing costs associated with the loan. As a result, an FHA-insured loan could equal nearly 100

percent of the property’s value or sales price—commonly called loan-to-value (or LTV) ratio.

Generally, mortgages with higher LTV ratios (smaller down payments) are riskier than

mortgages with lower LTV ratios and a substantial body of economic research indicates that

loan-to-value (or LTV) ratio is one of the most important factors when estimating the risk level

associated with individual mortgages. For example, the U.S. Government Accounting Office

(2005) reviewed 45 economic research papers that examined multiple factors that could be

important; of these, 37 examined if LTV ratio was important. Almost all of these papers (35)

found the LTV ratio of a mortgage important when estimating the risk level associated with

individual mortgages. One study found that the default rates for mortgages with an LTV ratio

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above 95 percent are three to four times higher than default rates for mortgages with an LTV

ratio of 90 to 95 percent.

More recently, Kelly (2008) analyzed a random sample of about 5,000 FHA insured

single family mortgages endorsed in Fiscal Years 2000, 2001, and 2002, observed through

September 30, 2006, and samples of about 1,000 FHA loans each from the Atlanta, Indianapolis,

and Salt Lake City metropolitan statistical areas in the same time period. He found that

borrowers who provide down payments from their own resources have significantly lower

default propensities than do borrowers whose down payments come from relatives, government

agencies, or non-profits. Borrowers with down payments from seller-funded non-profits, who

make no down payment at all, have the highest default rates. Additionally, borrowers who do not

make down payments from their own resources tend to have higher loss given default in the

small subset of loans that had completed the property disposition process. Thus, relieving the

buyer of the need to contribute cash to the purchase, via a gift from an uninvolved party, raises

the claim rate by 40% to 50%. Relieving the buyer of the need to contribute cash to the purchase,

by a “gift” from the seller that results in a higher loan amount, raises the claim rate by an

additional 38% to 50%. The extra difference in claim rates for gifts from seller-funded nonprofits

is broadly consistent with an equity-based explanation, as a 25% increase in claims for a 3%

decrease in equity. This research does make clear that, for whatever reason, borrowers with no

“skin in the game” (i.e., aid recipients) are higher credit risks than comparable buyers who bring

cash to the transaction. This research is consistent with that reported by James (2010) and

Demiroglu and James (2012). In short, skin in the game matters.

Habitat for Humanity

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The premier example of the importance of skin in the game is Habitat for Humanity

which was founded in 1976 and has more than 400 U.S. affiliates and operates in more than 90

countries. It is dedicated to eliminating substandard housing and providing low-income families

with the joy and dignity of homeownership. “Sweat equity” is the single most important strategy

Habitat uses to empower future homeowner families and one of the features that sets it apart

from other affordable housing providers. Sweat equity to refer to the hours of labor their

homeowners dedicate to building their homes and the homes of their neighbors, as well as the

time they spend investing in their own self-improvement. Most importantly, by going beyond a

mere financial investment in their property and physically working alongside other volunteers

and neighbors, Habitat homeowners gain a greater sense of self-worth and become more

personally invested in their community (Habitat for Humanity of Broward, 2015).

Sweat equity reduces the amount of paid labor needed for a house, which in turn helps

reduce costs. Having the involvement of the families themselves adds a sense of ownership to the

building process, and educates families on an entirely different level (Garafolo, 1997). Partner

families are also expected to pay it forward and assist others in building their homes.

Furthermore, those who receive assistance from Habitat are given the opportunity to improve

their financial skills. Budget counseling, homeowner maintenance, and even predatory-lending

awareness issues are addressed in offered courses. These programs are run in conjunction with

home construction in order to guide new homeowners to a financially stable future. A study

commissioned by the Dallas branch of Habitat, found that foreclosures in Habitat’s Dallas

market were less than 2% in 2010. Although the report only looked at the Dallas office of

Habitat, the findings mirror those found in other Habitat offices across the country, the

organization says (Wotapka, 2011).

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As can be seen in many of these examples, some sort of exchange is illustrated (e.g.,

down payment for a house; sweat equity for a home). On an interpersonal level, in some cases an

immediate exchange for aid and assistance may not always be feasible. In these cases it may be

important to highlight that the helper expects some recompense in the future. This pay back with

its accompanying sense of obligation and indebtedness is more formally known as reciprocity

and it is a powerful influence mechanism to which human cultures subscribe (Gouldner, 1960).

Indeed, world-renowned paleoanthropologist Richard Leakey indicated “We are human because

our ancestors learned to share their food and their skills in an honored network of obligation”

(Leakey & Lewin, 1978, p.16). Thus, to maximize the likelihood that the favor doer will be paid

back in the future he/she should invoke the reciprocity rule and not diminish the help given.

These subtle reminders should occur as part of a natural and equitable reciprocal arrangement.

Summary

For thousands of years various religious, moral, philosophical, and cultural perspectives

have appealed powerfully to individual’s humanitarian impulses and have encouraged helping

others—particularly the less fortunate. Over the last 40 or so years calls for this has been

amplified in what some call a “compassion boom” (Berland, 2010; Hoang, 2015). This

movement is almost universally accepted as virtuous and constructive and calls for altruism, and

other prosocial acts have been lionized. In some cases such help has been interpreted as a duty or

obligation. For example, noted moral philosopher, Peter Singer, makes a compelling case that

individuals should be doing much more to aid the needy than they are (Singer, 2015). Singer’s

main principle first stated in 1972 is that “if it is in our power to prevent something bad from

happening, without thereby sacrificing anything of comparable moral importance, we ought,

morally, to do it” (p. 231). Such a position has been promoted by many modern philosophers,

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theologians, and social scientists who often assume that aiding the disadvantaged is an absolute

good. Help, it is said, can be experienced as an expression of meaningful belongingness between

the beneficiary and the benefactor, eliciting positive feelings, favorable self-perceptions, and

gratitude (Fisher et al., 1982). Although giving behavior is said to benefit givers and takers and

organizations, and ardently praised in the abstract by leaders, it often comes at the expense of

those who receive it.

The receipt of aid constitutes a mixed blessing and often those helped may experience

“the curse of aid” (Djankov, Montalvo & Reynal-Querol, 2008, p. 169). The worthy aims of

altruism and other prosocial behavior may have long term socially detrimental effects and that

initiatives to engage in good acts are sometimes problematic (Kalman, 2010). A more refined

analysis that examines both the possible positive and negative effects of aiding the needy is

required. Usually, helping is looked at from an idealistic perspective and as such it is more a

reflection of what individuals would like it to be and not necessarily reflective of what could

happen. What is needed is not such a one-sided perspective but a search for unintended

consequences that may create surprising, unfortunate, and counterproductive effects. Indeed, a

growing body of research indicates that virtues can wreak havoc. Experiments by economists in

The Netherlands have demonstrated the dark side of fairness (Abbink & Sadrieh, 2009);

psychology professors have discovered how passion for work can become an unhealthy

obsession (Seguin-Levesque, Laliberte, Pelletier, Blanchard, & Vallerand, 2003); and a political

science professor researching the marksmanship of female marines showed how aiming for

excellence can backfire (Archer, 2010). Moreover, virtuous behavior may have both positive and

negative effects depending on levels. For instance, Grant and Schwartz (2011) noted that

excessive levels of numerous virtues often create problematic situations.

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Research on helping has focused primarily on the persons who give the help. In

comparison, very little research has been done on recipients of help and the consequences of

their receiving help. Although positive outcomes frequently occur following aid, unhelpful

effects may also ensue including loss of independence and a sense of indebtedness (Greenberg,

1980), a loss of freedom and chronic dependency on others (Nadler & Fisher, 1986), and

aversive psychological states such as “reactance” (Brehm, 1966). Helping others is indeed a real

virtue but individuals and firms must not hold that it is beyond question, scrutiny, or criticism but

should approach the idea of giving with a healthy dose of mindfulness lest they become blind to

the ways virtues sometimes hurt people.

We recognize that few people have bad intentions and agree with noted poet and literary

critic, T. S. Eliot, who said that “Most of the evil in this world is done by people with good

intentions” (n.d.). However, good intentions alone are not enough to make actions moral. This

paper discusses how helping others can exact an unintended toll on the needy and how the failure

to recognize this represents a disservice to the truth. It appears that every action and decision has

unintended consequences. Because of its pervasiveness Levitt and Dubner (2009) have elevated

unintended consequences to the status of a law (“… one of the most powerful laws in the

universe …”, p. XIV). Every action has both seen and unseen consequences, obvious and not so

obvious effects, positive and negative, and short and long-term outcomes.

Good intentions do not automatically lead to moral actions. Individuals must consider the

possible negative consequences before they give and help others. If individuals’ interventions

cause more harm than good, then they are morally questionable regardless of the loftiness of

their intentions. Just because kindness and compassion may appear praiseworthy people must

consider the possible harm that their proposed aid may cause. Individuals and organizations must

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stop implementing programs and activities that can be shown to create more injury than good.

Whether the long term assistance and help come from government, parents, a rich uncle, or the

lottery, the effect is the same—people will make no effort to become self-sufficient. Those who

are dependent have few choices; they must accept whatever is “given” to them. An inconvenient

truth illustrated here is that giving people something for nothing, that is, providing unearned

advantages not contingent on accomplishment, achievement, or merit fuels the likelihood that

such individuals will become increasingly dependent, entitled, lazy, and privileged. Daniels

(2001) has coined the aphorism, “If you give people something for nothing, you make them good

for nothing” (p. 77), to describe the harmful effects of sustained unearned aid.

The Habitat for Humanity model suggested here appears to be consistent with Nadler’s

model of intergroup helping (Nadler, 1997, 1998, 2002; Nadler & Halabi, 2006), which

distinguishes between autonomy-oriented and dependency-oriented help. The Habitat model,

which emphasizes autonomy-oriented assistance, appears to be consistent with two classic

maxims that are commonly supported: 1) “Give a man [sic] a fish and you feed him for a day.

Teach a man [sic] to fish and you feed him for a lifetime;” and 2) “Give a hand up, not a

handout.” Unfortunately, “helping people help themselves” rhetoric simply takes the idea as

being the same as “helping people” and there is often little or no suspicion that assistance can be

unhelpful in the sense of overriding or undercutting self-help and is thus quite antithetical to

helping people help themselves.

We believe that autonomy-oriented assistance can restore an aid recipient’s agency. In

the absence of meaningful behavior on the recipient’s part to earn some benefits, long term and

repeated charity (not cases of crisis relief) is likely to impede rather than promote growth,

autonomy, and development. When there is no apparent link between behavior and rewards,

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individuals may begin to believe that they deserve rewards regardless of how they perform.

Having skin in the game makes the connection between performance and rewards more

noticeable and reduces the erosion of the aid recipient’s work ethic and problematic feelings of

entitlement and dependency.

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