Charity case

Although charity represents over 2% of the GDP ($240 billion) in the United States, even its most basic economics remain relatively unstudied. In Toward and Understanding of the Economics of Charity: Evidence from a Field Experiment , Landry et al. develop a model for charity and specifically test the demand side of the function by using empirical data from a Natural Hazards Mitigation Research fundraiser at East Carolina University. The research demonstrates that the “lottery” method (raffles for charity) outperforms the traditional voluntary contribution method (VCM) yielding considerably more money and a greater participation rate. Investigation into the solicitor characteristics corroborates fundraising philosophy that factors such as attractiveness, obesity, self-confidence, assertiveness, and race affect giving.

Two methods of fundraising, each with two subsets, were compared. The first type, VCM, relies on solicitees to donate money to a cause described by the solicitor. Commonly known as the “warm-glow of giving, the basis for this type of donation is the impure altruism model, which acknowledges that although altruism is the main reason for giving there are other motives that should be factored into a model. The subsets for VCM are the traditional donation (i.e.just giving money) and the “seed money” donation. Seed money is funds received prior to eliciting donations from the public, and its purpose is to indicate credibility of the charity to the giver which will increase contributions. However, the model reasons that seed money can have a secondary, negative effect because it increases the provision level of the public good which reduces the marginal utility. A decrease in marginal utility can negatively impact individual contributions. This reasoning illustrates the major obstacle that in particular VCM charities face called the free-rider condition. Free-riding occurs because any individual money contributed is relatively small so individuals can reap virtually the same benefit of the charity without the disutility of having to actually donate money. The model hypothesizes that the improved certainty of the charity’s credibility far outweighs the reduction of marginal utility by seed money.

The second type, the lottery method, uses a raffle for charity for fundraising. In this study, the subtypes are one large winning and four, smaller payouts. The authors argue that multiple gifts make people feel more confident about winning, and therefore more likely to participate (i.e instead of average contributions do not increase but rather participation does.) The main reason for the lottery’s putative success is that it provides extra incentive for donation.

For empirical testing, the four types of fundraising were directly compared using door-to-door fundraising solicitation: Group 1- traditional Voluntary Contribution Method (VCM) Group 2- VCM with $1000 anonymous seed money donation Group 3- lottery method with one $1000 prize raffle prize with tickets based on relative individual contribution Group 4- lottery method with four $250 prizes also with tickets weighted by individual contributions

A total of 4833 households were approached with between 960 and 1400 household being approached in each group (1186, 1282, 963, and 1402 for the respective groups). The results were statistically normalized, and they indicated that lottery method was superior in that it generated 50% more gross proceeds and 100% increase in the rate of participation. The groups raised $452, $526, $688, and $752, respectively, and participation was 25.3%, 14.8%, 45.5% and 35.9%, respectively. Thus, the only deviation from the model is that the individual prize lottery yielded greater participation then the multiple prize one, but this is overshadowed by the fact that the multiple prize lottery generated more proceeds. The twofold increase in participation of the lottery is especially significant because it provides a “double dividend”: not only does the charity collect more money today, but the list of givers can be used to target people more likely to give in future campaigns. Universities have benefited from the utilization of this “warm list” to create more honed, higher grossing fundraiser.

Using a personality test to measure solicitor traits, the empirical study found confidence positively contributed 4% to overall money and assertiveness lowered donation totals by 3.2%. Personality traits had a greater effect on participation rate then gift size. College students rated the attractiveness of female fundraisers (ironically on a 1-10 scale), and found that a one standard deviation unit increase in attractiveness boosted the average gift size by between 50% and 135%. Also, this one SD increase in a VCM survey produced results that were similar to using a lottery method without needing to give away a prize. Not surprisingly, males answering the door had a much higher participation rate with the more attractive fundraisers. Race also played a factor in contribution: Caucasians were 40% more likely to give to Caucasian solicitors. Caucasian solicitors also raised $1.68 at Caucasian houses verses $0.95 at non-Caucasian households. The researchers argue that certain characteristics that the soliciter/solicitee share or possess may lower transaction costs between the two parties which encourages giving.