Econ Class Raises Thousands for Local Charity

June 4, 2016

MIDDLEBURY, Vt. -- This spring students studying the economics of philanthropy with Professor Jeff Carpenter designed an experiment that ended up raising more than $4,000 for the local charity H.O.P.E., which provides goods and services to low-income residents.

The students focused on the potential of incentives – in this case lottery tickets – to impact charitable giving. Carpenter, the James Jermain Professor of Political Economy, recently wrote a letter to the editor of the Addison Independent summarizing the experiment:

During April (and early May) my students ran a fundraising experiment in Addison County to the benefit of a very deserving local charity, H.O.P.E. In the experiment the students were asked to go out into the community and solicit donations, door-to-door. The purpose of the experiment was to examine whether awarding a prize, via a lottery, would increase participation and the amount given per solicitation. In this case we used pari mutuel lotteries, a version of which is the common 50-50 lottery wherein half of the ticket sales (i.e., donations) go to the charity and the other half finance the prize awarded to the winning ticket holder, to allocate the prizes. The economics are (somewhat) straightforward here: assuming people are altruistically predisposed to give to a good cause, they should be even more likely to do so when there is a chance to win a prize – two motivations to give must be better than just one, right?

The results are interesting. Not only did many of you open your doors to the students (we visited 1100 homes in the county) almost half of you made a donation. This level of generosity is unparalleled in my experience and just reinforces why we all continue to live here. Considering participation more closely, we see that instead of just asking for a donation, if we give lottery tickets in exchange for a donation, people are much more likely to give something. Without the lottery, 27% of people make a donation while 45% do so when they are given lottery tickets and a chance to win a prize. This makes perfect sense (even to an economist).

Well, what about the amounts donated? For those 448 people who made a donation, the average amount given was $9.81. What is interesting here is that the donors in the lottery treatments gave $8.72, on average, while those who did not have the chance to “play lotto” gave an average of $15.05. That’s right, people without the chance to win a cash prize gave more.

Now this clearly does not “jibe” with standard economic theory so what can be going on here? A book I just got in the mail from a former advisor of mine provides a good, and very efficient, explanation. All you have to do is read the title: “The Moral Economy: Why good incentives are no substitute for good citizens.” From a non-standard (i.e., behavioral) economics point of view, what can happen is that incentives can sometimes “crowd out” pro-social behavior like giving to charity. For people who wish to focus on helping our beneficiary, the lottery and its prize can make the fundraising effort seem, for lack of better term, “icky”. In other words, many people want all the money to go to the charity and are not interested in winning a prize, especially if that prize reduces the amount going to charity. In fact, some of our donors in the lottery treatments refused their tickets. These people are warmed by the perception of themselves as doing good and don’t want this self image muddied by other incentives like, in this case, wanting to win a cash prize.

Putting this altogether, the punchline is that although the lotteries increased participation substantially and this is clearly good for the amount raised, because the donations were substantially lower in the lottery treatments, perhaps because of this crowding I discussed above, the amount raised per solicitation (including zeros for all the people who chose to not donate) was the same across all the treatments. Adding a self-financing prize to the fundraiser did not yield more money and, in fact, the net giving (donations minus the prizes) was considerable higher when no prize was offered. Instead of thinking of clever ways to incentivize people to give, in Vermont, you are better off just relying on the fact that most of our neighbors are very “good citizens.” 

In the end we raised over $4500 and, on behalf of my students and HOPE, I want to thank all of Addison County for opening your doors and giving. The students tell me that they learned as much about being a member of a community this past month as about the economics of philanthropy.

Jeffrey Carpenter
James Jermain Professor of Political Economy
Middlebury College