Charity ratings

How do charitable donors respond to the third party ratings that signal the quality of charities? I investigate this question using a novel data set from Charity Navigator which provides quality ratings for 5400 charities. Since Charity Navigator prominently displays a charity’s star rating which is assigned based on its overall rating, one can identify the causal impact of a one star increase in ratings on charitable contributions with a regression discontinuity framework that exploits the threshold values of the overall ratings. I find that in general, the third party ratings have a minor and often insignificant impact on charitable contributions received by charities. However, for relatively smaller and unknown charities, a higher rating leads to an increase in charitable contributions received. In particular, for these charities, I find that a one star increase in ratings is associated with a 19.5 percent increase in the amount of charitable contributions received. This result is robust under alternative model specifications and highlights the role of the third party ratings in not-for-profit markets.