Good News, Bad News, and Social Image: The Market for Charitable Giving

We develop a simple theory and conduct a laboratory experiment to explore the e↵ect of information about charities’ performances and its public visibility on the intensive margins of charitable giving (i.e. existing donors). In our model existing donors with di↵erent preferences for giving treat their donations as either complements or (imperfect) substitutes to the quality of the charity. Greater e ciency induces some donors to give more, since an extra dollar donated goes “further”. Other donors instead reduce their giving, because the same e↵ective donation can now be achieved with a smaller nominal contribution (i.e. crowd-out). Similarly, when information about “quality” is immediately recognizable by others, its social signaling value provides extrinsic incentives to image motivated donors to modify their giving: on the one hand higher e ciency increases the marginal return on social image of an extra dollar donated, thus giving increases; on the other, higher e ciency reduces the monetary cost of looking pro-social, and donors trade-o↵ the amount they give with the “quality” of the recipient. Our experimental results show no evidence of a substitution e↵ect when information is received privately; that is, giving is always non-decreasing in the “quality” of the recipient. Di↵erently, when information has a social signaling value, we find that 34% of donors decrease their giving when charities are better-than-expected, and (marginally) increasing giving when worse. These results support the hypothesis of a substitution e↵ect for image-motivated donors. JEL-Classification: C91, D64 ⇤For helpful comments we thank Omar Al-Ubaydli, Jared Barton, Jon Behar, Marco Castillo, Rachel Croson, David Eil, Dan Houser, Ragan Petrie, Tali Sharot, and Marie Claire Villeval. †Becker Friedman Institute for Research in Economics (BFI), Department of Economics, The University of Chicago. Email: [email protected] Corresponding author. ‡Assembly General Inc. Email: [email protected]