Saturday, April 7, 2012

Nudging on Donations

Mostly Economics points to the new working paper by Dean Karlan and John List that suggests an innovative way for charities to signal their credibility nudge donors into increasing their donations. Karlan and List write,
We develop a simple theory which formally describes how charities can resolve the information asymmetry problems faced by small donors by working with large donors to generate quality signals. To test the model, we conducted two large-scale natural field experiments. In the first experiment, a charity focusing on poverty reduction solicited donations from prior donors and either announced a matching grant from the Bill and Melinda Gates Foundation, or made no mention of a match. In the second field experiment, the same charity sent direct mail solicitations to individuals who had not previously donated to the charity, and tested whether naming the Bill and Melinda Gates Foundation as the matching donor was more effective than not identifying the name of the matching donor. The first experiment demonstrates that the matching grant condition generates more and larger donations relative to no match. The second experiment shows that providing a credible quality signal by identifying the matching donor generates even more and larger donations than not naming the matching donor. Importantly, the treatment effects persist long after the matching period, and the quality signal is quite heterogeneous - the Gates’ effect is much larger for prospective donors who had a record of giving to 'poverty-oriented' charities. These two pieces of evidence support our model of quality signals as a key mechanism through which matching gifts inspire donors to give.
In this context, I have blogged earlier about studies by the same duo and others about how matching contributions and its magnitude can provide signals that can increase the amounts of donations made by prospective donors. Quality signals are powerful mechanisms to "crowd-in" funds from donors.

But there is nothing surprising about this finding since this underlying premise underpins much of modern financial markets. If Warren Buffet invests in a particular stock or fund, the chances are that it will attract a herd of investors! In fact, hedge funds raise private capital by playing up the credibility of their prior investors and using that to encourage prospective investors. Start-up firms which have atleast one big angel investor will find it much easier to raise additional capital.

This also has important longer-term lessons for the aid and philanthropy businesses. The powerful impact of credible lead donors, like Bill and Melinda Gates, should be leveraged to multiply the amounts of money that can be raised. For example, the Gates Foundation could work with a series of smaller non-government organizations (NGOs) within sectors where the Foundation is already active, provide small seed capital, and then encourage those NGOs to leverage it to solicit additional funds from other donors. I am sure this model is already being used by the larger foundations and their donees, though the share of their funds routed through such partnerships may be small.  

In fact, this is what multilateral agencies like the World Bank and the UNICEF have been doing for years. They provide the first tranche or seed funding for new initiatives and projects,, which is then leveraged to raise additional capital, both from private sector and other non-government agencies. The presence of the Bank or UNICEF provides the necessary reassurance to these lenders and donors that necessary due diligence has been done and the project is worthy of support and their investments and donations are less likely to go down the drain.

Therefore, is it time that the larger and more reputed private donor agencies leverage their brand name and reputational value to help smaller organizations raise more capital and thereby multiply the amount of money that can be mobilized to serve the same causes espoused by the larger donor?

No comments: