Small is Beautiful - Experimental Evidence of Donors' Preferences for Charities

This paper examines how providing potential donors with information about the revenues of a charity affects charitable contributions. When individuals make a real-life donation decision, they usually do not have precise information about a charity's income streams. They usually do not know whether and how much their neighbors or other people in their social community donate to a certain charity and it is questionable whether they are aware of the exact amount of government subsidies to that charity. They rather have a belief about the charity's size in terms of entire revenues, i.e. whether it is small or large. With regard to the information about a charity's revenues, various theoretical approaches may be relevant which do not necessarily point in the same direction. Some models assume a positive relationship between past revenues and donations while others suggest a negative relationship. So far, experimental studies have examined either the effect of government contributions or the effect of other private donations on charitable contributions but not the net effect thereof. Given the empirical nature of the problem and the gap in the experimental literature, we conducted a framed field experiment where a non-student subject pool was asked to make a real donation decision. Half of the subjects could choose whether to give to a charity with relatively low annual revenues or to a charity with relatively high annual revenues. Abstracting from other effects, such as the charities' reputation, our results indicate a negative relation between a charity's entire revenues and private donations to that charity. Our study also provides insights why donors prefer the small organizations and, therefore, discriminates between different theoretical approaches, offering a valuable insight to fundraisers. For most people the lower administrative costs, the higher impact of the own donation, and the neediness of the charity organization are decisive for choosing the small organization.

Borgloh, Sarah, Astrid Dannenberg and Bodo Aretz (2010), Small is Beautiful - Experimental Evidence of Donors' Preferences for Charities, ZEW Discussion Paper No. 10-052, Mannheim.