Charitable giving accounts for around 2 percent of U.S. Gross Domestic Product, and has been steadily increasing in real terms, doubling over the past twenty years. This increase has been largely unaffected by economic turbulence, and has allowed for the provision of many important public goods. What's more, economic research on charitable giving has enabled a clearer understanding of individual behavior, optimal fundraising among charities, and government tax and spending policies. Each of these domains has received extensive treatment in the literature, often yielding substantial theoretical and practical insights.
The question of exactly what makes a donor say yes to a charity's solicitation presents a window into the economic behavior of individuals. While Adam Smith famously observed that we do not rely on the “benevolence of the butcher” for our dinner (Smith 1976), it is also true that we observe costly pro-social behaviors like giving in societies across the globe. What accounts for this generosity? Two major possibilities economists have considered are (1) that individuals give primarily to affect outcomes (Bergstrom, Blume, and Varian 1986) and (2) that there is a “warm glow” of giving (Andreoni 1989), wherein individuals who contribute feel pleased to have “done their part.”. Beyond internal psychological rewards of the giving itself, donating to a charity is often a social activity, as people may be soliciting donations and those around you are observing your decisions. Accordingly, those who donate may do so due to external pressures or out of a desire for status as well.
As with individuals, charitable organizations also change their behavior in response to incentives. Andreoni and Payne (2003) document charities decreasing fundraising efforts due to increased government grant support. This fundraising activity is itself the subject of extensive study focusing on its extent, methods, and effectiveness. Early field experiments on these topics evaluated the effectiveness of seed money (List and Lucking-Reiley 2002) and comparisons to others (Frey and Meier 2004) on individual donations, observing that both factors have an impact. Effective fundraising activities can confer prestige on donors (Glazer and Konrad 1996) and signal project quality (Vesterlund 2003; Andreoni 2006).
Governments often attempt to stimulate charitable giving by providing tax deductions grants and matching funds, as in the case of disaster relief. Research on changes in the tax deductibility policy tends to show that charitable giving is price elastic, with a recent estimate placing the elasticity at –1.2 (Auten, Sieg, and Clotfelter 2002). That is, a small incidence of tax increase will lead to a proportionally larger decrease in charitable giving. Government grants to charities are shown to crowd out individual donations, but they also may signal quality and increase individual donations to a particular charity, counteracting the crowding out effect to some degree (Andreoni and Payne 2011).
See also: Reciprocity; Smith, Adam, and Moral Sentiments; Smith, Adam, and Theory of Moral Sentiments; Warm Glow
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