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Charitable Giving – How hard can it be?

Michael Sanders

Jeremy Clarkson, of Top Gear fame (among other things), made use of his column in this Sunday’s News Review[1] (in the Sunday Times, paywalled), to bemoan the death of philanthropy, and to propose a surprisingly economist-friendly explanation; the arrival of substitutes.

As Mr Clarkson says, “it’s because in the days of (William) Morris, and my great-granddad there wasn’t much you could actually buy”. Certainly it is true that since the 1930s the sheer number of status symbols required to maintain the kind of upper-middle-class lifestyle expected of a Times columnist has increased dramatically, and it is also true that charitable giving is, for many parts of society, on the decline[2]. That people, when given the choice between buying mosquito nets for others half way around the world or a new iPad for themselves, choose the iPad, seems intuitively simple. It is also on sound footing economically; if a preferred substitute comes along, from which you extract greater utility, substituting from one into another is only natural, and as the relative price of the substitute declines (as is typical for technology), we might expect the level of this substitution to increase.

Governments of all stripes appear to have agreed with this basic assessment, with the last Labour government reducing the ‘price’ of giving by making Gift Aid, a tax-efficient means of giving, available on donations of all sizes (previously it was available only on donations of £250 of more), and the current, coalition government, aiming to increase the ‘return’ on giving through rises in the Gift Aid Benefit Limit to “enable charities to give ‘thank you’ gifts”[3].

If all this seems sensible, what can we say about the conclusion to the article, that for Philanthropists, “their investment is going to make them a damn sight happier than the man who spent his cash…” on something more frivolous. Traditional economic theory suggests that this should not be the case. Following the Weak Axiom of Revealed Preference (WARP), if an individual chooses to buy a grande skimmed-milk extra shot mocha rather than mosquito nets, we can conclude that he prefers, given his income constraints, coffee to mosquito nets. Simplistically, this situation appears to be Pareto optimal – it is impossible to make one party (those at risk of mosquito-borne-disease) better off, without worsening the lot of another (our coffee drinker). Although it is possible to make a moral argument for redistribution from coffee to mosquito nets to improve social welfare, we might expect Clarkson’s pleading with us to give more to charity to fall upon deaf ears.

Some insight into why a narrow view of economics might seem to be wrong, and the Sunday Times’ most controversial columnist might be right, can be found in Behavioural Economics. A large quantity of research, summarized by Dellavigna (2009)[4] and Bernheim & Rangel (1995)[5], suggests that individuals may make decisions which are not only socially undesirable, but personally undesirable as well.

While changes in the relative price or value of giving may increase individuals giving, it is, of course, costly to do so, and will be less effective than governments might hope if, as the literature suggests, would-be donors are inattentive to the benefits of giving, or to the changes in policy.

In the coffee vs nets example, we can see another reason for the government to explore in depth the lessons of behavioural economics when planning the “Big Society” – these lessons are already being learned, and to great effect, by the firms with which charities are competing for funds. The placement of biscotti, mints and caramel waffles near the till in coffee shops, the offer made by baristas or their local equivalent (“would you like to go large on that?”), and defaulting to a mid-sized cups, are all Nudges; examples of behavioural economics put into practice.

It is clear that if the government is to achieve a ‘step change’ in the level of giving in the UK, and in so doing make both donors and recipients happier, charities will need the tools to compete with private firms and the willingness to use them – behavioural economics has the potential to offer those tools, and they are already being used to great effect by the competition.


[2] Smith et al (2011): “The State of Donation” Centre for giving and philanthropy.

[3] HM Treasury (2011) “Budget 2011” HM Treasury, HC836

[4] Dellavigna (2009): “Psychology and Economics: Evidence from the Field” Journal of Economic Literature Vol 47 No 2 pp315-372

[5] Bernheim & Rangel (1995): “Behavioural Public Economics: Welfare Policy Analysis with Non-Standard Decision Makers” NBER Working Paper 11518

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Small steps towards the Big Society?

January 7, 2011 Leave a comment

Mike Sanders and Sarah Smith

 

Last week’s Green Paper set out the government’s strategy for encouraging people to give time and money – part of its vision of a Big Society. There were few concrete ideas – beyond the suggestion that ATMs provide prompts to donate – but instead a set of guiding principles: Great opportunities, Information, Visibility, Exchange and reciprocity and Support (GIVES). In a nutshell – people need new and exciting ways to give (such as at ATMs) and they need to know about them; their giving needs to be visible and it needs to be valued. This is a potentially exciting time for the sector – even as many are worried about the effects of government spending cutbacks – it provides fertile ground for experimentation to see what works and what does not. In designing potential pilots, there is a growing body of evidence to build on.

A number of field experiments with individual charities have found successful triggers that can encourage people to give – these include announcing lead donations, providing a match, rewarding donors with small gifts, making donations public and telling people how much others have given. The findings have led people to generalize about what motivates people to give – signals of quality for individual charities, the desire for prestige, reciprocity etc – yet single-charity studies can only tell us about what motivates people to give to specific charities. None of these studies has looked at whether the triggers simply cause people to give more to charity A at the expense of charity B. There is a real risk that all the shiny new opportunities simply cause people to change the way that they give and a need to show that new schemes increase total giving, not just shuffle it around. To achieve that, there needs to be more understanding of what the real barriers are to people giving – and what can be done to eliminate them.

One of the big ideas in behavioural economics is that defaults can have a powerful effect on people’s behavior in overcoming inertia; they have been shown to work in relation to employer pensions with auto-enrolment leading to big increases in participation. Payroll giving is an obvious extension that we hope to test. But one important lesson from past research is that the detail of the default matters – a low default, while increasing participation, could lead to some people reducing the amount that they give. There also needs to be evidence that a scheme that helps someone to help others can work as well as a scheme that helps someone to help their future selves.

The emphasis on visibility accords with the findings from research which finds positive peer effects. For example, Frey and Meier (2004)[1] found that when students were told that a higher proportion of past students had donated to a good cause, 64 per cent compared to 46 per cent, this had a positive effect on the proportion who gave – but the increase was small at around 2 percentage points. But, as with defaults, providing so-called “social information” can have a negative effect if the amounts that others have given are low. Alpizar et al (2008)[2] found that informing people about a low modal donation increased participation but reduced the average donation (compared to no social information). More interestingly for the ATM proposal, suggestions to give particular amounts that are imposed from above have been found to have a negative effect. Alpizar & Martinsson (2010)[3], show that compared with a social reference that comes from peers, a suggestion from the charity reduced both the probability of giving and the conditional amount given.

Evidence from ultimatum games in the lab, and from elsewhere, suggests that individuals have a preference for fairness[4], and that this preference is a driving force behind their charitable donations. Based on this, and the increasing prevalence of ideas such as a “Robin Hood tax” and “UK Uncut”, suggesting a belief that corporations, and in particular banks, are bearing too little of the burden of economic hardship, would seem to suggest that the encouraging charitable giving through boxes emblazoned with the logos of banks may not have the desired effect. One response to the ATM suggestion on BBC’s Have Your Say website was that “If bank cards started nagging me to donate I think I’d give LESS not more[5].

 


[1] Frey, B. & Meier, S. (2004) “Social Comparisons and Pro-social Behavior:  Testing “Conditional Cooperation” in a Field Experiment” American Economic Review Vol 94 No 5 pp 1717-1722

[2] Alpizar, F., Carlsson, F. & Johansson-Stenman, O. (2008) “Anonymity, reciprocity, and conformity: Evidence from voluntary contributions to a national park in Costa Rica” Journal of Public Economics Vol 92 issues 5-6 pp1047-1060

[3] Alpizar & Martinsson (2010) “Don’t tell me what to do, tell me who to

follow! – Field experiment evidence on voluntary donations” Working Papers in Economics No. 452

[4] Barr & Zeitlin (2010) “Dictator Games in the lab and in nature: External validity tested and investigated in Ugandan Primary Schools” CSAE WPS/2010-11

[5] BBC (2010): “Ministers urge giving to charity at the cash machine” BBC News Website http://www.bbc.co.uk/news/uk-politics-12085506