Good News, Bad News, and Social Image: The Market for Charitable Giving
Luigi Butera, Jeffrey Horn
University of Chicago
Assembly General Inc.
We develop a simple theory and conduct a laboratory experiment to explore the effect of information about charities’ performances and its public visibility on the intensive margins of charitable giving (i.e. existing donors). In our model existing donors with different preferences for giving treat their donations as either complements or (imperfect) substitutes to the quality of the charity. Greater effciency induces some donors to give more, since an extra dollar donated goes “further”. Other donors instead reduce their giving, because the same effective donation can now be achieved with a smaller nominal contribution (i.e. crowd-out). Similarly, when information about “quality” is immediately recognizable by others, its social signaling value provides extrinsic incentives to image motivated donors to modify their giving: on the one hand higher effciency increases the marginal return on social image of an extra dollar donated, thus giving increases; on the other, higher effciency reduces the monetary cost of looking pro-social, and donors trade-off the amount they give with the “quality” of the recipient. Our experimental results show no evidence of a substitution effect when information is received privately; that is, giving is always non-decreasing in the “quality” of the recipient. Differently, when information has a social signaling value, we find that 34% of donors decrease their giving when charities are better-than-expected, and (marginally) increasing giving when worse. These results support the hypothesis of a substitution effect for image-motivated donors.
SPI Quick Look:
Do existing donors modify their donations when they receive news about how efficient the charities th3y are funding are in serving their mission? This paper shows that when information is privately received, donors respond to good news by increasing their donations, but are generally unresponsive to bad news about the efficiency of their charities (e.g. they do not reduce their contributions). However, when information can be leveraged for social image purposes, donors who care about the prestige value of their giving treat the "quality" and the quantity of their giving as subsitutes: when good news is received, donations are reduced, and when news is bad, donations are increased. The paper shows that this is because prestige-motivated donors realize that less money is needed to look good to others when their recipients are efficient (e.g. "I may not be giving much, but my charities are top-notch"), but more money is needed to compensate for giving to inefficient charities.