Informative Fundraising: The Signaling Value of Seed Money and Matching Gifts

Abstract

While existing theory predicts that matching leadership gifts raise more voluntary contributions for public goods than seed money, recent experiments find otherwise. We reconcile the two by studying a model of leadership giving in a large economy with incomplete information about the quality of the public good provided by a charity. Both the fundraising scheme employed by the charity and the contribution decision by the lead donor may signal the charity's quality to subsequent donors. The charity solicits optimally for a matching gift if the lead donor is informed about the quality of the public good. Intuitively, an informed lead donor conveys quality information to downstream donors through the size of her contribution. As a result, the charity has no signaling concerns and opts for matching because it mitigates the free-riding incentives among donors and leads to higher contributions. The preference for matching, however, reduces when the lead donor's information is limited. Then, the lead donor’s contribution is less informative and the high quality charity utilizes the fundraising scheme to convey information. In particular, the charity uses seed money as a costly signaling device to convince donors of its high quality. As a result, seed money becomes a strong signal of quality and induces higher expected contributions by donors.