The Economics of Charitable Giving

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.

[And by the way OPB, your appeal would be more effective to me if I could hear you clearly - what is it with reception in the Sellwood-Moreland area? - it sucks]

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...

Economist's Notebook: The Economics of Charitable Giving

My drive to Corvallis has suddenly gotten much longer - it is pledge drive time at OPB. This, however, does get an economist thinking - why do people give charitably?

We generally assume people are altruistic - they like to see the poor being helped, for example - but the first best is always for the poor to be helped, but for me to keep my money. In general for public goods we call this the free-rider problem, since I can get just as much OPB whether I contribute or not there is no reason for me to contribute. Yet I, and many others, do. Well, perhaps it is because we actually get satisfaction from the act itself - economists call this the 'warm-glow' motive - in which case we are actually making ourselves happier by contributing.

But is it all true this way that economists think about these decisions? Well, the emerging field of 'neuro-economics' hopes to better understand such things by watching brain function of people in the process of making such decision through the use of functional MRI. One such person working in this field is Bill Harbaugh of the U of Oregon, who has looked at charitable giving and has found:

Consistent with pure altruism, we find that even mandatory, tax-like transfers to a charity elicit neural activity in areas linked to reward processing. Moreover, neural responses to the charity's financial gains predict voluntary giving. However, consistent with warm glow, neural activity further increases when people make transfers voluntarily. Both pure altruism and warm-glow motives appear to determine the hedonic consequences of financial transfers to the public good.

So, it appears that it is a general part of our preferences: we may be hard wired to get pleasure from charitable acts.

Now there are a few caveats: functional MRI is looking only at one type of brain function and is pretty crude relative to the sophistication of the brain. So, just because we see stimulus in certain areas of the brain it is not yet clear that we can generalize this into preferences the way that economists think of them. However, that said, the results suggest that you are happier if you give.

Given this result we might want to ask: what is altruism? Or, it is really altruism if we get pure pleasure from it?

Either way, OPB is waiting for your call...