Good News, Bad News, and Social Image: The Market for Charitable Giving

Abstract

We develop a simple theory and conduct a laboratory experiment to explore the effect of information about charities’ performances and its public visibility on the intensive margins of charitable giving (i.e. existing donors). In our model existing donors with different preferences for giving treat their donations as either complements or (imperfect) substitutes to the quality of the charity. Greater efficiency induces some donors to give more, since an extra dollar donated goes “further”. Other donors instead reduce their giving, because the same effective donation can now be achieved with a smaller nominal contribution (i.e. crowd-out). Similarly, when information about “quality” is immediately recognizable by others, its social signaling value provides extrinsic incentives to image motivated donors to modify their giving: on the one hand higher efficiency increases the marginal return on social image of an extra dollar donated, thus giving increases; on the other, higher efficiency reduces the monetary cost of looking pro-social, and donors trade-off the amount they give with the “quality” of the recipient. Our experimental results show no evidence of a substitution effect when information is received privately; that is, giving is always non-decreasing in the “quality” of the recipient. Differently, when information has a social signaling value, we find that 34% of donors decrease their giving when charities are better-than-expected, and (marginally) increasing giving when worse. These results support the hypothesis of a substitution effect for image-motivated donors.