A Signaling Explanation for Charity
Many people feel that donating to charity is purely an altruistic action. However, the authors of this paper suggest otherwise. Instead, they suggest that donating to charity in many cases is a way for people to conspicuously signal their wealth. As evidence, the authors looked at donations to a charity and found that the majority of donations came in at the minimum amount to make it to the next tier. For example, if the categories were between $0-$99, $100-$199, $200-$299 donations would be clustered at the $100 level and the $200 level. Economic theory suggests that donations should be more evenly distributed - that people should donate what they can pay. However, donations were clustered at the bottom of the next tier suggesting that people are making donations as a way of signaling.
In addition, the authors argue that donations are a better signal of wealth than things like luxury products. In many cases excessive conspicuous consumption is banned by social norms. One who is too gluttonous or showy is considered overly ostentatious. Second, luxury products are not always reliable signals because they can be faked. Donating to charity may actually be a more stable signal of wealth.
To support their hypothesis, in their data they found that anonymous donations are rare. For example, in one year the Pittsburgh Philharmonic got 29 anonymous donations out of 2240, and Yale Law School got only 4. They further hypothesized that donations wouldn't exist if people had homogeneous incomes because everyone would already know the wealth of others. However, heterogeneous income distribution should trigger increased giving.
Rational economically theory would predict that people should want to donate to nonprofits that have low overhead/donor costs; however the authors suggest that people are more likely to donate when the charity 1) publicizes it, and 2) publicizes it to the right people. This leads to high overhead/donor costs.
Theoretical and practical relevance:
This paper has wide implications for non-profit organizations. They may consider keeping their donor costs low is a good thing. But it turns out it may backfire and they should spend their money advertising their patrons to the right people.