A Theory of Outsourced Fundraising: Why Dollars Turn into “Pennies for Charity”

Charities frequently rely on professional solicitors whose commissions exceed half of total donations. To understand this practice, we propose a principal-agent model in which the charity optimally offers a higher commission to a more “efficient” solicitor, raising the price of giving significantly. Outsourcing is, therefore, profitable for the charity only if giving is very price-inelastic. This, however, clashes with empirical evidence. We show that paid solicitations can benefit the charity if: (1) donors are unaware; (2) donors have intense “warm-glow” preferences; or (3) the charity worries mostly about watchdog ratings. We argue that informing the public of the mere existence of paid solicitations may be the most effective policy available.