Charitable Giving When Altruism and Similarity Are Linked
Executive Summary — Harvard Business School professor Julio J. Rotemberg looks at what makes people decide to contribute to a charity. He focuses on two psychological factors: that people feel better about themselves when other people agree with them, and that people tend to be more charitable to other like-minded people. Key concepts include:
- The aforementioned psychological factors largely determine when and why people decide to donate to certain charities.
- The fact that donations are often based on perceived camaraderie helps to explain why people continue to donate to a certain charity even when they know that the charity has been largely subsidized by the government or another organization that makes large donations.
- This paper suggests that charitable organizations that differentiate themselves from other organizations with similar objectives by seeking funds from distinct donor groups may succeed in their competition with less focused competitors.
This paper presents a model in which anonymous charitable donations are rationalized by two human tendencies drawn from the psychology literature. The first is people's disproportionate disposition to help those they agree with while the second is the dependence of peoples' self-esteem on the extent to which they perceive that others agree with them. Government spending crowds out the charity that ensues from these forces only modestly. Moreover, people's donations tend to rise when others donate. In some equilibria of the model, poor people give little because they expect donations to come mainly from richer individuals. In others, donations by poor individuals constitute a large fraction of donations and this raises the incentive for poor people to donate. The model predicts that, under some circumstances, charities with identical objectives can differ by obtaining funds from distinct donor groups. The model then provides an interpretation for situations in which the number of charities rises while total donations are stagnant.