Information Costs and the Impact of Giving

• In Event: Donations and financial issues

Abstract

In this experiment, we examine how the incidence of information costs affects the efficiency of charitable giving. Information about the cost-effectiveness of charities is a costly public good that provides mostly public rather than private benefits (Mitchell and Coupet 2023). We propose and test the hypothesis that individual donors are more willing to pay to obtain and use information about the cost-effectiveness of charities when information costs are borne by agents other than themselves. Specifically, we evaluate giving efficiency across two conditions: either the subject has the opportunity to pay from the subject’s own budget or the subject has the opportunity to pay from the budget of another hypothetical participant. In both scenarios, the subject is informed that both budgets, net of information costs, will go to the nonprofit selected by the subject from a list of ten organizations. If the hypothesis is supported, the findings would suggest that the impact of the charitable sector could be increased by reallocating who pays for information from privately to publicly motivated funders.
Only a relatively small share of donors allocate their giving based on information about the impact or cost-effectiveness of nonprofits (Hope Consulting 2010; Bekkers and Wiepking 2011). We argue that the resulting allocative inefficiency of giving is caused, at least in part, by donors’ reluctance to pay to acquire information. A growing number of experimental studies show that giving behavior is largely driven by so-called warm glow motivations (e.g., Crumpler and Grossman 2008). Obtaining costly information to inform giving may actually reduce private warm glow because a portion of the donor’s time and money must be diverted from directly supporting charitable activities to purchasing and evaluating information about charitable activities. The former mainly produces private, warm glow type benefits, whereas the latter mainly produces public, positive externality type benefits. Because the benefits of information largely accrue to other parties, individual donors will tend to acquire too little information, negatively affecting giving efficiency.
The main outcome variable is the total impact of the combined charitable giving from the subject and the collaborator, which is the product of the total donation amounts (net of information costs) and the cost-effectiveness of the chosen charity. The cost of information is randomized to evaluate pricing effects.
The results of the experiment will reveal both subjects’ sensitivities to information costs as well as their propensities to acquire information conditional on who pays for it. We expect that subjects will make more efficient decisions when (1) information costs are lower and (2) another party pays for the information. This research has important implications for sector theory, notably contract failure theory, which is predicated on information being prohibitively costly to obtain (Hansmann 1980). The research could also have significant public policy implications, for example, by suggesting that government information subsidies could increase the social impact of the nonprofit sector through efficiency improvements. Finally, information intermediaries that assess cost-effectiveness to inform giving, such as Charity Navigator and GiveWell, may find the research helpful for developing their services.

References

Bekkers, René, and Pamala Wiepking. 2011. "A Literature Review of Empirical Studies of Philanthropy: Eight Mechanisms That Drive Charitable Giving." Nonprofit and Voluntary Sector Quarterly 40 (5): 924-973.
Crumpler, Heidi, and Philip J. Grossman. 2008. "An experimental test of warm glow giving." Journal of Public Economics 92: 1011-1021.
Hansmann, Henry. 1980. "The Role of Nonprofit Enterprise." The Yale Law Journal 89 (5): 835-902.
Hope Consulting. May 2010. Money for Good: The US Market for Impact Investments and Charitable Gifts from Individual Donors and Investors.
Mitchell, George E., and Jason Coupet. 2023. "Sector Theorists Should Revisit the Role of Information." In Reimagining Nonprofits, edited by Curtis Child and Eva Witesman. Cambridge, UK: Cambridge University Press.

Authors

• George Mitchell, Baruch College

• Chengxin Xu, Rutgers University-Newark

• Huafang Li