Arnold Kling  

Errors in Charitable Giving

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Tyler Cowen reports on some disturbing research. For example,


Donors to charities, it seems, do not behave rationally. Increasing evidence shows that donors often tolerate high administrative costs, fail to monitor charities and do not insist on measurable results

Tyler and other professors probably will not like this, but I think that the most irrational phenomenon in charitable giving is donations to colleges and universities. To me, giving money to Harvard and Swarthmore is like making charitable contributions to Microsoft and Exxon.


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/528
The author at Acton Institute PowerBlog in a related article titled Donors Have Responsibilities writes:
    A recent NYT article outlines some recent research showing that many people who give to charity “often tolerate high administrative costs, fail to monitor charities and do not insist on measurable results — the opposite of how they act when they inv [Tracked on June 16, 2006 10:21 AM]
COMMENTS (13 to date)
Nathan Smith writes:

Arnold,

Don't universities engage in the creation of knowledge? Isn't knowledge a "non-rival good" which, once created, can be used by anyone? Doesn't that mean that knowledge-creation has large positive externalities?

Giving money to Harvard and Swarthmore can't be like giving money to Microsoft and Exxon. It's either better or worse. Better if Harvard and Swarthmore are engaging in knowledge-creation. Worse if what they're really doing is creating social inequality by credentialing an elite, and/or stifling the creation of knowledge by trapping knowledge in the false categories of obsolete ideas. If you want to make that argument, you'll need to put in a bit more work.

Bill Newman writes:

I seem to be halfway between Nathan Smith and Arnold Kling.

By my estimate, a very large fraction of the money that people give to universities goes to, and is intended to go to, rival goods like educating individuals and passing on the school tradition. I still don't think it's like giving to Exxon, but it might be like giving to one's favorite football team (and of course, for some universities it *is* in fact giving to one's favorite football team:-), or perhaps to Fox News or Dan Rather.

However, there is also an impressive amount of knowledge which has come out of the universities, and it seems unlikely that all of it could've been produced as rapidly at places like Exxon. It might be that the value of much of the university product is less than nothing, and it might be that much of the clearly-valuable fraction could've been produced by profit-making entities, but I would nominate the groundwork in quantum mechanics 1900-1930 and in molecular biology 1940-1970 as very valuable work which would've been difficult to do on a profit-making basis.

English Professor writes:

I'm somewhat more cynical than the previous posters. Giving money to wealthy colleges is done out of vanity. The donor can say, I contributed to make XYZ University what it is.

N. writes:

I think I might want to take a different tact here and say that it is irrational to connect the motivation of a donor with the performance of his charity of choice. From his contribution, I think the donor tends to receive:

(a) Increased feelings of self-worth on the basis of having done "something good."

(b) Increased status among cohorts by being associated with "good works."

(c) A feeling of being part of something "bigger than oneself" which is often cited as contributing to individual happiness.

(d) And, conversely, increased insulation against feelings of guilt which might be provoked when encountering evidence of social maladies elsewhere (say, when pressured by someone to join another charity, or when watching the news, or in response to direct-mail appeals from other charities (or, indeed, subsequent mailings from the same one)).

Which has nothing to do with the concrete consequences of the donation and everything to do with the act of giving. Indeed, I would wager that, on the margin, the more visible a charity is to a donor, the better a donor feels giving money to it, and the greater the increase in status from being associated with it among his peers (which is counterintuitive, if you consider that the function of a charity is not self-promotion).

In this way, I think a donation to a charity is in many ways the modern-day equivalent to a votive sacrifice to the gods. You are giving something of value to influence something you otherwise have no control over, the primary outcome being that you sleep better at night. On the one hand, it's irrational. On the other, is it so irrational if it works, and you *do* sleep better? Aren't you getting your money's worth?

A brief anecdote that's kind of related:

About two years ago, after an upsetting encounter with a pan-handler, I got particularly depressed about the problem of homelessness which seemed to be everywhere around me (I live in New York City). I ended up sitting down on a park bench a talking to a beggar, asking him how he got to where he was and what he wanted for himself in the future. We talked about the social services outreach in the city and whether he thought they were helpful. He said he really didn't like them, and his reasoning should make sense to any economist: so long as homelessness continues to "be a problem," the folks in the social services had jobs. If they were to 'fix' the problem, then they'd be the ones out on the street (so to speak). Thus it is in their best interest to see the problem continue, not resolve it.

Now, that said, I can't see how any charity would avoid falling into this trap, unless it was really and truly focused on concrete, definable, *marginal* gains (and thus extremely small in scale, organizationally). Even then, such a charity would have to be extremely vigilant in avoiding unintended self-subsidy. That is, it would need to be obsessively aware of the consequences of its actions, and practically blind to the intentions behind them.

For all I know, such organizations do exist, but I think they would look functionally quite different from the majority of institutions which have solicited me for donations over the years.

Barbar writes:

so long as homelessness continues to "be a problem," the folks in the social services had jobs. If they were to 'fix' the problem, then they'd be the ones out on the street (so to speak). Thus it is in their best interest to see the problem continue, not resolve it.

Pretty weak explanation. Incentives cut both ways (even government programs can be cut back, or funds can be moved around, and believe it or not I understand that some people who work in social services are motivated by wanting to make a real difference). I'd be curious about the beggar's theory on why his own incentives didn't steer him towards solving his problem, though.

Mcwop writes:

Which is better? Giving $299 to United Way or buying an iPod? The money spent on the iPod will generate tax revenues (sales tax, possible corporate profit tax, taxes on salaries associated with creation and distribution), it will support the people that design and market it, and the people that manufacture it. I see little difference, except if one wants to nitpick where it is manufactured (as if people in foreign countries are not people who need to support themselves too). Never mind all the associated economic activity created by accessory makers.

Should makes one think, it could be a wash, or maybe buying the iPod creates more societal benefit? Not arguing against charitable contributions, but it isn’t as simple as people make it out to be.

morganja writes:

Good grief!
Has any economist actually ever given money to a charity? Everyone here sounds like it is some strange excotic foreign custom beyond comprehension, like female circumcision or soccer. One has to understand what motivates the person the second they decide to write a check. Sitting in a tree and observing the 'tribe' from across the street during fund drives doesn't tell us anything useful. Here is a hint. Many people here in the US tithe. Yes, right here in the US. They have already decided that they are going to give 10% of their income to charity, they just choose best they can with the limited knowledge they have of charities.

As to why people give money to universities, the motivation is most likely provided by the incessent indoctrination that universities instill in their students for the specific purpose of getting contributions from them later in life. School loyalty and school pride are effective long range funding timebombs that go off at various times in peoples lives, most often seemingly associated with an aging crises.

MjrMjr writes:

Re:Harvard and Swathmore being equiv. to Exxon or MSFT... I can see that analogy. Harvard has what, a one billion dollar endowment? I remember reading that its a high enough figure that they could stop charging tuition if they wanted to, at any rate. It could be argued that Harvard basically has enough to money to do just about anything they want.

Giving money to a less well off school, say GMU, might be a little different. Presumably they're much more constrained in what they can choose to do than a wealthier school like Harvard.

Practicality may not matter for Harvard alums. Large donations could be a signaling mechanism. What the money ends up funding may not be as important as the signal of success it sends to one's peers. A large donation that gets ones name on theater/performance programs, a plaque on a wall somewhere, a library named after the donor... I imagine there's a certain amount of cachet that goes along with that.

Patri Friedman writes:

I totally agree! I believe that endowments destroy the quality of education. The more a school's income comes from the fixed rent on its endowment assets, and the less it comes from pleasing its students, the worse a job it will do. Its employees will concentrate on fighting over access to the rents instead of making profit.

jaimito writes:

Harvard and Exxon the same thing? I may consider endow Harvard's Jaimito Chair for Research of the Jaszbereny Status-Quo Jewry, my favourite subject, but not for a Jaimito Discount Gas Station on the 47th Street.

"N." is right. Donors have different objectives than those stated or assumed by researchers.

Steve Y writes:

A couple of thoughts on the subject:

1) last year the new CEO of the publicly held company where I work decreed that the company will no longer match charitable donations to colleges and universities (most non-sectarian 501(c)(3) organizations still qualify for the match). I saw his point, and while this begs the question of whether corporations should donate to charitable organizations at all, I approve.

2) I didn't go to Harvard, but I donate regularly to two educational institutions that also could easily forego charging tuition and have already announced plans to do so for certain students. I am under no illusion that my paltry contributions will be missed if I don't make them, but I do so primarily out of gratitude for the education I have received and the doors that have been opened because their names are on my resume. (Before you ask, gaining entrance for my children is not a possibility.) Not rational self-interested behavior to be sure, but I am not an economist.

FXKLM writes:

I think giving money to a school is more analogous to tipping a waiter than it is to other forms of charity. You give the money because you feel the school has earned it by providing a valuable education or an enjoyable experience, not because you feel that the school has an especially sympathetic need for cash.

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