Poster #10 - Behavioral Charity: Third-Party Ratings of Nonprofits as Salience and Heuristics

• In Event: Friday Poster Reception

Abstract

The current literature on donation behavior generally assumes that donors are rational. They invest time, effort, and thought before making donations. In this context, third-party rating agencies make access to information easier (access mechanisms), which can be used as a credible signal of nonprofit transparency (transparency mechanism). Rationality at a minimum requires that donors spend time and effort to assess the usefulness of the rating: what rating means and what quality information rating uses. However, if donors are boundedly rational and susceptible to judgmental biases, they may not spend the time and effort to go through all relevant information despite having easier access through third parties, and they may not have sufficient cognitive capacity to process all information from the signal of transparency. They may not assess the quality of rating either. In this paper, I provide evidence that donors utilize an apparently naïve third-party rating as salience and heuristics to make donation decisions. I used data from a nonprofit rating that uses a simple rating relying on nonprofits’ self-reported unverified data. Any nonprofit can obtain a rating from this rating agency by providing self-reported information that is not verified. Rational donors can detect the naivety of the rating and, therefore, their donation will not be influenced by it.  Using five-year panel data on all nonprofits that submitted Form 990 between 2014 to 2018, I demonstrate that even a naïve rating significantly affects donations when donors are less rational and more behavioral. I demonstrate that behavioral donors employ naïve ratings as a salience and heuristic to make quick decisions. As salience, the naive rating helps donors pay attention to a limited number of nonprofits. As such, rating makes rated nonprofits more salient and increases donation flow to them. On the other hand, some donors are more sophisticated and use mental accounting as a shortcut to identify better nonprofits among the rated nonprofits. They donate more to nonprofits with higher ratings. I use the Inverse Propensity Weighted (IPW) fixed-effect model and the Augmented Inverse Propensity Weighted (AIPW) fixed-effect model to demonstrate the robustness of my findings.   

Author

• Md Ashraful Haque, Syracuse University
  Presenting Author