24 Why Do People Give ? LISE

The vast majority of Americans make charitable contributions. In 2000, 90 percent of U.S. households donated on average $1,623 to nonprofit organizations.1 Why do so many people choose to give their hard-earned income away? What motivates them to behave in this altruistic or seemingly altruistic manner? The objective of this chapter is to present a short summary of what economists have learned about the motivations for individual charitable giving.2 This is a question of substantial importance, as individual contributions account for more than 80 percent of total dollars given.3 If we do not understand why people give, then how can we encourage them to become donors or to increase their contributions, and how can we predict the effect changes in the economic environment will have on giving? One way to think about charitable giving is that it is just like the purchase of any other commodity. That is, we expect contributions to depend on how much we earn and how costly it is to give. In the first part of the chapter I examine how the individual’s income and the price of giving affect her contribution. Determining how individuals respond to these factors is crucial not only for predicting how total donations respond to changes in tax policy and how fundraisers can take advantage of these changes, but also for determining how the government best can design subsidies such as the tax deductibility of donations to nonprofits.4 While the similarity with ordinary commodities is clear when we examine responses to changes in income and prices, it is less so when we want to determine what motivates us to make such a purchase or contribution. What is it that we get in return from these transactions? What tradeoffs do we face when we give our money away? In the second part of the chapter I discuss the potential benefits of giving. There are many types of benefits and they vary with both the individual and the organization. Economists typically classify them into two groups. One group is public in nature because both the donor and other individuals benefit. For example, while a donor may care about the provision of the nonprofit’s output, this same output may simultaneously benefit other individuals. The second group is private in nature. Giving may make you feel better about yourself, it may make you feel like you have done your share and perhaps paid back to the community, or it may give you prestige or an acknowledgment that you would not otherwise get. Since no one but the donor can enjoy these aspects of giving, we characterize them as private benefits. Why does it matter whether the benefit from giving accrues solely to the donor or affects the well-being of other donors as well? The reason is, in part, that the characteristics of the benefit help us determine whether voluntary contributions are likely to result in the “right,” or optimal, level of contributions. If everyone views the benefit from giving as entirely private then each individual will contribute an amount that reflects her valuation of the nonprofit, and as a result the voluntary provision level will be optimal. If on the other hand the benefit is public, then the contribution by another donor provides the exact same benefit as one made by yourself, and since it is costly for you to contribute you have an incentive to free-ride off the contribution of others. In the presence of other donors an individual who is motivated by the public benefit will choose to contribute less than she would absent these donors. When the benefit is public we predict that too little of the public good will be provided. To determine whether benefits from giving are primarily public or private, economists have examined the following distinct predictions of these two alternatives: an increase in the contribution of others is expected to decrease an individual’s contribution when the benefit of giving is public, and it is expected to cause no change in giving when the benefit is private. Most empirical studies of survey or donation data find that on average the benefit appears to be private in nature. This suggests that the last dollar that we give to charity is not motivated by the nonprofit’s output. This is an extreme result, and one may question whether the nonprofit’s output truly can be irrelevant for our decision to give an additional dollar to charity. In the final section of the chapter I investi-