Seed Money Effects
Professional fund-raisers take leadership gifts (otherwise known as seed money) seriously. Conventional wisdom suggests that substantial seed gifts should be secured during the so-called ‘quiet’ phase of a fundraising campaign.
John List and David Lucking-Riley designed an experiment in 2002 to provide the first test of this wisdom. As part of a capital campaign to fund the Center for Environmental Policy Analysis (CEPA), solicitation requests were mailed to 3,000 central Florida households randomly assigned to six different treatment groups of 500 households each.
Experimental treatments were designed to evaluate the impact of leadership gifts – so treatments varied in the proportion of total project costs provided by an initial seed donation. Variations ranged from 10% of the needed total provided by the seed grant, to 67% of the needed total provided.
‘we have already obtained funds to cover 10% of the cost for the computers, so we are soliciting donations to cover the remaining 90%’
‘we have already obtained funds to cover 67% of the cost for the computers, so we are soliciting donations to cover the remaining 33%’
Experimental results were striking – increasing seed money from 10% to 67% generated a six-fold increase in contributions. Participation rates more than doubled, increasing from 3.7% to 8.2%.
List and Lucking-Riley, 2002 “Effects of Seed Money and Refunds on Charitable Giving: Experimental Evidence from a University Capital Campaign.” Journal of Political Economy
In another study conducted in 2008, Daniel Rondeau and John List conducted a mail solicitation with 3,000 supporters of the Sierra Club. Potential donors were asked to support the expansion of a K-12 environmental education program. The announcement of the leadership gift increased participation rates by 23%, and total dollar contributions were increased by 18%.
Rondeau and List 2008. “Matching and Challenge Gifts to Charity: Evidence from Laboratory and Natural Field Experiments,” Experimental Economics
In 2008, John List and co-authors conducted another study of the effects of seed money, this time focusing on a door-to-door campaign. 5,000 households were approached as part of a fundraising drive for the Center for Natural Hazards Mitigation Research at East Carolina University.
Households that answered the door were provided an informational brochure about the Hazards Center and read a fixed script that outlined the reason for the visit. Across all treatments, potential donors were informed that proceeds raised in the campaign would be used to fund the Hazards Center.
In the treatment that included seed money, potential donors were informed that the Hazards Center had already received a commitment of $1,000 from an anonymous donor.
We can look to both proportion contributing and the amount contributed, given that a contribution was made. In this case, seed money has the biggest effect on contribution amounts – raising the average gift conditional on contributing from $4.00 at baseline to $7.85 with seed money.
However – an interesting finding was that the seed money also ‘crowded out’ the lowest donors. Those donors who contributed just $1 at baseline, chose not to contribute at all with seed money. This result dropped the participation rate from 25% to 14%. Overall, total amount raised with seed money was still higher.
Craig Landry, Andreas Lange, John List, Michael Price, Nicholas Rupp, “Toward an Understanding of the Economics of Charity: Evidence from a Field Experiment”
Economists believe that seed money may work through decreasing the overall ‘cost’ of the provision of the public good and increasing the perceived quality of the charity. The use of upfront money provides an important avenue for charities to influence donor behavior and acquire new gifts. However, in certain cases, seed money may actually ‘crowd out’ the smallest donors.
Thus, fundraisers should be careful when using seed money. Fundraisers should think about the type of donor they are targeting, and whether typical donors provide large or small gifts. Fundraisers who can use direct experimentation at their own organization can learn the best way to put seed money to good use.
Also learn about Matching Gift Effects.
If you are interested in partnering on a research project utilizing seed money at your organization, please contact us.