Economic science of charitable giving

By Patrick Emerson
Oregon Economics Blog

As the OPB latest fund-drive comes to a tortured end – ‘just a little more time because we need just a little more money!’ – it seems like a good moment to learn about what economists have learned about charitable giving…You can travel the country and pretty much every public radio station you’ll hear sticks to the same pledge drive script – which makes sense, with so much experience, public radio must have figured out exactly what works and has fine-tuned it to a precise science.

Turns out that there are some things fundraisers have learned that are a bit contrary to what standard economic theory would predict.  Take matching gifts for example: people respond to them but it doesn’t matter if they are one-for-one or more than that – they give the same extra amount either way.  Economic theory would predict that when you increase the marginal benefit of an action we should do more and that this effect should be monotonic – ever increasing.

Another interesting fact is that givers seem to be goal-orientated: Universities always start campaigns in ‘quiet phases’ and don’t go public with them until they have made substantial progress toward that goal. Rightly so it turns out: people respond more when they think the goal is obtainable and realistic.  This does correspond to economic theory if it is the goal itself that created the marginal benefit of giving.

Public radio loves to say ‘give whatever is right for you’ but then proceeds to recommend some figures: dollar-a-day, $120, etc.  These figures actually influence giving more than one might think: the key it turns out is to give a person a figure that is a bit above average but not too much.  A study in Texas used a $300 figure to successfully get people to give more than the average ($75), but $600 was too much – people felt connected to the $300 (‘it could possibly be me that could give that’) but not $600 (‘that is someone much wealthier than me’).

It also turns out that we don’t just give for altruistic reasons, we give because it makes us feel good about ourselves as well.  I like to know that I am helping out poor people in developing countries when I give to Oxfam, say, because I like to help others but I also like how that makes me feel about myself.  This is a bit self-serving, but not really a bad thing – I am giving after all.  Bill Harbaugh at the U of O found that when you create categories, e.g. ‘sustaining member,’ most people will give the minimum of the category ranges.  Why should this be if it is purely altruistic?  Because it is not – we like being a ‘sustaining member’ not just a ‘member.’

Finally the most basic economic principle that governs this enterprise is the free rider principle that is part-and-parcel of public goods.  It is likely that OPB gets only about 10% of its listeners to give something because listeners know that if they don’t give it is likely someone else will and then they can get the good for free. OPB does not want you to know the real figure because it may serve as a disincentive to giving: if you know that so many people are free-riding you may not want to facilitate that selfish behavior.  In fact it is pretty amazing that they can get even 10% to give given the pure public good nature of radio.

Which reminds me – it is time for me to get my renewal form back to OPB. And thank goodness the pledge drive is over…

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