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Market Forces for Nonprofits: Theory and Evidence
Friday, Jan. 4, 2019
2:30 PM - 4:30 PM
Association for the Study of Generosity in Economics
Demand for Giving to Multiple Charities: Theory and Experiments
We study how competition among charities affects individuals’ giving behavior. We characterize situations where charities benefiting substitute or complementary causes incentivize donations by offering subsidies in the form of rebates. Our theory predicts that an increase in the rebate rate offered by a given charity relative to a substitute charity will shift donations away from the substitute charity, but this “stealing” effect is not expected when complementary charities are considered. Our model further characterizes the conditions under which total donations increase with rebates. We test the model in an experimental setting, and demonstrate that the experimental results support our theoretical predictions. We derive the demand for giving as rebates vary for both substitute and complementary causes. The social net benefit of rebates is calculated by comparing campaign costs with new donations generated.
Does Market Size Matter Also for Charities?
We analyze implications of market size for market structure in the charity sector. While a standard model of oligopolistic for-profit competition predicts a positive relationship between market size and firm size, our analogous model of competition between prosocially motivated charities predicts no such correlation. If charities are biased towards their own provision, a positive association between market size and provider size can arise. We examine these predictions empirically for six different local charity markets. Our empirical findings suggest that charities do not solely pursue prosocial objectives, and that increased competition in the charity sector can lead to rationalization in provision.
Informative Fundraising: The Signaling Value of Seed Money and Matching Gifts
While existing theory predicts that a matching leadership gift raises more donations than seed money, recent experiments find otherwise. We aim to reconcile the two by studying a model of sequential fundraising under incomplete information about the charity’s quality. Both the fundraising scheme employed by the charity and the contribution decision of the lead donor may signal the charity’s quality to subsequent donors. With exogenously informed lead donor, the charity optimally solicits the lead donor for a matching gift independent of its quality and the size of the gift credibly reveals the charity’s quality to the follower donors. Under costly information acquisition, the lead donor becomes less reliable in conveying the charity’s quality as she might choose to remain uninformed. Consequently, the charity employs the fundraising scheme itself to credibly signal its quality. In particular, the high quality charity solicits the lead donor for seed money more often and for matching gift less often than the low quality charity. As a result, seed money becomes a signal of high quality and matching-a signal of low quality. Thus, consistent with experimental data, seed money is associated with higher quality and raises more donations relative to matching.
University of Notre Dame
Florida State University
H4 - Publicly Provided Goods