GIVING TO CHARITY: MULTIPLE DONATIONS ENCOURAGE GENEROSITY IN OTHERS

Giving to a charity multiple times may encourage others to give more generously, according to new research by Professors Parimal Bag and Santanu Roy, published in the January 2008 issue of The Economic Journal. Their analysis also suggests that legislation requiring political parties to disclose large donations may actually generate more funds.

The researchers’ analysis runs like this: suppose an individual donates a substantial sum of money to a charity. This may deter others who believe that the charity, though worthy of donation, needs fewer resources than the first donor does. Other potential donors see no need to give as they believe that the existing donation is sufficient. This is undesirable from the perspective of the first donor, who would like others to contribute money as well.

But if the first donor staggers their giving over a longer time period, others will not be sure if a further gift will be forthcoming. As such, they may be more likely to give themselves to make up for any shortfall. Almost every major natural disaster in the world is followed by a string of announcements of donations and pledges by governments and other organisations. Initial pledges are often revised upwards, as governments learn about the pledges of others.

For example, following the Asian tsunami in December 2004, the US government first pledged $15 million, then $35 million and finally $350 million as other countries responded with their own pledges. In January 2005, the International Herald Tribune reported that ‘Japan’s pledge made the US package the second-largest so far. ’ The same report noted that Taiwan increased its pledge from $5 million to $50 million.

Organised fund-raising drives by charities and non-profit organisations for specific causes are often designed so that major contributions are announced publicly during the campaign and major donors often make multiple contributions in the course of the same campaign. Without considering the effect of giving on other donors, it is difficult to see why the same donor should contribute multiple times.

The researchers argue that because the donors’ true willingness to give to a charitable cause is often unknown to other donors (due to uncertainty about their budget situation or how much they really care about the cause) staggering donations over time can increase the total amount raised from all donors.

Realising that others may draw inferences about their true willingness to give from their announced donations, a donor with high willingness to pay for the charitable cause may hide his or her ‘true preferences’ to discourage others from withholding contributions at later stages of the campaign.

Therefore, a donor may make moderate contributions early on, which convey little information about his ‘type’, and add further contributions later if the funds raised prove inadequate.

The authors show that this can explain why announcement of donations generates multiple contributions from donors in the course of the campaign and also why charities, political parties or international bodies involved in fund-raising (with a common objective) may expect an increase in the funds raised by announcing donations during the campaign.

Their argument works even if all donations are motivated by a purely philanthropic goal and not made for reasons of snob value, ostentatious display of wealth or competition for social status.

The authors also show that even if a charity acquires superior information about some or all major potential donors’ willingness to pay through pre-campaign research or previous experience, it may be in their interest to not share this information with donors at large; keeping donors in the dark about each other works to the advantage of the charity.

ENDS

Notes for editors: ‘Repeated Charitable Contributions under Incomplete Information ’ by Parimal Bag and Santanu Roy is published in the January 2008 issue of The Economic Journal.

Parimal Bag is at the National University of Singapore. Santanu Roy is at Southern Methodist University in Dallas.

For further information: contact Parimal Bag on +65 163 997 (email: ecsbpk@nus.edu.sg); Santanu Roy on +1 214 7682714 (email: sroy@smu.edu); or Romesh Vaitilingam on 07768 661095 (email: romesh@compuserve.com).