What Drives the Economics of Charitable Giving?

The economic choices people make when they donate are often complicated

This is an edited version of a podcast interview originally published in Econofact, a non-partisan publication designed to bring key facts and incisive analysis to the national debate on economic and social policies. EconoFact is overseen by Michael Klein, a professor of international economics at The Fletcher School.

Charity is a centerpiece of religions. St. Augustine wrote, “Charity is a virtue which, when our affections are perfectly ordered, unites us to God, for by it, we love him.” In the Jewish tradition of tzedakah, charitable giving is a commandment and a moral obligation. The Quran says that there is a recognized right for the needy and deprived over our wealth.

But in economics, researchers typically think of people as self-centered, and perhaps even greedy. Given this, what can economics add to our understanding of charity?

To understand more, I spoke with Laura Gee, associate professor of economics at Tufts. Along with an impressive list of publications in peer-reviewed journals, her research has been cited in popular press outlets such as CBS News, Fast Company, Forbes, and the Chicago Tribune.

What are the estimates of the amount of charitable giving in the United States each year?

According to Giving USA, a publication that comes out annually, in 2021 Americans gave $484 billion to charity. That was about a 4% increase over the last year they measured, but if you adjust for inflation, which was high that year, it’s pretty flat. In fact, as a portion of GDP, giving in dollars in the U.S. is usually around 2% of GDP, and has been for quite some time.

This doesn’t always include everything, though, because we don’t just give gifts of money, we also give gifts of time. That is valued at about a $200 billion, which is about 50 hours per year from each volunteer. About 25% of Americans report volunteering in any given year.

What’s the breakdown of charitable giving across categories, such as the social safety net, community projects, the arts, and other categories?

Let’s start with money—it is easier to measure sometimes. About 25% of monetary donations every year in the U.S. go toward religious organizations. Next highest is education, which is about the same as the amount that goes to human services, which includes things like fighting hunger for people in need and housing issues. Another big one is health, including research about diseases, and then further down the line are contributions to things like the arts, the environment, and animal well-being.

What about contributions in terms of time, rather than money?

The number one thing for volunteering is giving time toward alleviating hunger and helping the unhoused. Around the holiday season, people will often volunteer to hand out meals to people who are unhoused or people who are having hunger issues. The next largest volunteering giving is for health and for religion.

The ordering for volunteering is different from monetary donations, which I think means people don’t think gifts of time and money are perfectly substitutable.

People who give money are also more likely to give time, but that doesn’t mean that the two things are necessarily going to increase with each other all the time. It could just be that those are the type of people who love giving in all different forms.

The evidence that I find most compelling comes from studies in a lab setting. They find that gifts of one type going up tends to make gifts of the other type go down.

Giving to these different types of charities obviously appeals to different motives. What does economics have to say about the various motives for charitable giving?

Many religions have codified monetary donations, such as tithing or tzedakah, while fewer have codified suggestions for volunteering hours. Mormons, for example, are supposed to contribute 10% of their income to the Church of Jesus Christ of Latter-Day Saints every year.

Is there any controversy about what “income” means?

There is. Obviously you get a paycheck—that’s income. But what about if you got a $500 cash gift from a friend or a family member? What if instead you got a couch from a family member that was worth $500? Are those things income? A couple of economists studied this. They found that

Mormons are more inclusive of income, perhaps because they know that God is watching.

What about, for example, passing around the donation plate?

In churches, quite often they will pass around a donation plate; each person gets it, and they see what the other person gives. It’s not necessarily codified to give, but there is certainly social pressure to give.

You don’t want to be the one person who doesn’t put in some money. You can see what the person before you put in, which sets a social norm for the amount of giving. Obligation and pressure from external sources are a big driver of monetary donations.

In the Jewish tradition, there’s a lot of giving that goes on before Yom Kippur, and there’s a famous joke where people keep giving more and more, and finally, the last person stands up and announces that he’s going to give $1 million, anonymously. How important is it that people know that their gifts are going to be acknowledged or not? Is there any research on that?

There is a lot of different research on that. Some findings come from economists who do lab studies, giving people money to come in for the experiment. They ask the subjects to make donations to a charity, having some be public and some private. They find in those settings that when they make the donations public, the number of people who donate goes up, and the amounts go up.

That’s related to groups, but economics typically focuses on individual choice. In this context, what does economics say about charitable giving?

Economists have often viewed charitable giving as a bit of a puzzle, because the traditional economics model says we only care about our own consumption. So our traditional models would predict that no one should be giving to charity.

How have economists come to terms with this? Because we do see a lot of charitable giving.

One thing that economists have put out there is that people enjoy the act of giving itself, so it’s actually a consumption good to make a donation. The popularized name for this is “the warm glow of giving.” Then, if giving is itself an enjoyable activity, just like going to the movies or something, it’s going to be something that you want to do.

What about other aspects of giving? For example, we hear on fund drives for public radio, “We need 10 more donors in the next 20 minutes to reach our goal, so we’ll get a match of $5,000.” Have people looked at the effects of this kind of incentive on giving?

Yes, and I have worked on this, too. People like giving when they feel like they’re going to be pivotal to reaching some goal, and as the goal comes close, they feel more and more personally pivotal to its success.

I’ve run some studies around this question. I had a lab experiment where people came in and made decisions where I could observe everything they’re doing. We told them we’re one donation away from our goal, and in that setting, people were more likely to donate than if I didn’t tell them we’re one away.

Then I also paired that with a huge field study where I sent out different versions of letters to potential donors. One version of the letter said, “please give,” and one version of the letter said, “hey, we have a goal, and we’re one away from the goal. Please give.” We did find that when we say we’re one person away from this goal, people are much more likely to donate.

If charitable giving is so important, and we would like to see support for the arts, the disadvantaged, health care, and research, why doesn’t the government just do it? The government is supposed to be the expression of the will of the people.

I think this is a really interesting question, and one that I will admit is not my area of expertise. The U.S. has much higher per capita charitable giving than most other countries. We also have much fewer codified social services for people. For instance, we don’t have universal health care. The other countries that give a lot, they give half as much as the U.S., and they also have a lot more social services, like universal health care—New Zealand and Canada being examples.

In the absence of the government stepping in, a lot of people in the United States do in fact then step in and provide money for the disadvantaged, provide money for arts, provide money for basic health care research, and so on.

Exactly, and I think that goes along with a lot of the ethos of the founding of the United States, that everyone individualistically gets to decide what they feel is important. In the U.S., I think that there’s this mentality that individuals don’t want to be told what is important for them to donate to.

They want to get to choose. I’m the type of person who thinks the arts are really important, so I’m going to donate to the arts, or I’m the type of person who thinks that giving to unhoused people is important, so I’m going to give to that.

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