Really, Don’t Tell Me: Voluntary Contributions and the Effects of Watchdog Ratings

Charities provide public benefits that are difficult to measure and often unverifiable for the donors, creating a one-sided information deficit. To diminish this information asymmetry, watchdog organizations provide donors with ratings of charities based on each charity’s financial performance. The information can increase donor awareness of individual charity performance and provide a metric of relative performance. Watchdog ratings, ranging from 0to 4-stars in this study, likely affect donor choice, changing and redistributing donations among charities. This research measures this informational effect on contributions for over 5,400 charities in the US. The data contain eight years of ratings from the largest third-party charity evaluator and eight additional years of tax data prior to the ratings. The first approach uses differences within-charity after the information is available. The second and pivotal tactic calculates, using identical methodology of the evaluator, unpublished scores of each charity from financial data before being rated. This approach isolates the effect of observing the rating by creating a counterfactual of unpublished information to compare with the published. The third specification adds regression discontinuity: star-rating breakpoints have an underlying continuous distribution of scores. Charities with similar scores but a one-star difference in ratings have distinct outcomes in contributions. Counter to expectation, observed ratings reduce contributions, regardless of star rating, by 3 to 30%, where annual donations average $18 million per charity per year. The model and discussion describe how ratings may lead to donor scrutiny and also how financial information relates to goods and service output. These ideas demonstrate potential unintended consequences of shifting donations based on efficiency rather than effectiveness. The effects are particularly germane to the relatively-smaller charities and those with far-removed goods, such as the environment or foreign aid. Acknowledgements: Matthew Kotchen, Charlie Kolstad, Paulina Oliva, James Andreoni. Doug Steigerwald and the UCSB Econometrics Research Group. UCSB Environmental Economics Lunch Group. Funding from NSF grant 0114437 and UC Regents Fellowship. This is a draft; feedback and notifying of possible errata are most welcome. JEL: H41 Public Goods, D82 Asymmetric and Private Information 1 [email protected] Bren School of Environmental Science & Management University of California 4420 Donald Bren Hall, Santa Barbara, CA 93106-5131