Undercover Economist

Even in a recession, charitable giving can go up as well as down

Last month, Red Nose Day, a biennial charity extravaganza, managed to break its fundraising record despite the recession. But to what extent are charities recession-proof? Much depends on what motivates us to give, a subject that has been receiving a lot of attention from economists recently.

There are many possible motivations. One is pure altruism: we give to charity because we care about the well-being of others. A second infamous motivation for giving was advanced by the economist James Andreoni: the “warm glow”. Warm-glow givers donate money to charity because it makes them feel good.

There might not seem to be much difference between altruism and a warm glow, but there is: warm-glow givers don’t think too much about whether the money they give will be effective. For example, research by the behavioural economist George Loewenstein, with Deborah Small, a marketing professor, and Paul Slovic, a psychologist, shows that people are typically more generous when presented with an identifiable victim – six-year-old Aisha in Niger – than with statistical evidence of hunger in Niger. While the altruist would want the evidence, the warm-glow giver just wants to feel the connection. A third motivation is social pressure: we give because we think that’s what others expect of us.

All this matters, particularly if we want to understand what happens in a recession. Altruists might well give more. “It’s not rocket science,” says Dean Karlan, an experimental economist who researches charitable giving and microfinance. “The poor are also poorer now, so altruists can achieve more with their donation.” But as Karlan warns, not everyone is an altruist.

John List, a leading light in the field of experimental economics, recently carried out an experiment designed to tease out some of the motives for giving. His team went door-to-door collecting for charities, but in some cases they had forewarned their targets as to the time of their arrival. Genuine altruists would be more likely to give if forewarned, for much the same reason that you are more likely to be in to receive a delivery if told what time it will arrive. But people who give because they feel pressured might simply hide behind the sofa when the charity collectors knocked on the door. In some cases, they could even tick a “do not disturb” box to avoid awkwardness.

List’s experiment, carried out with two University of California, Berkeley, economists, Ulrike Malmendier and Stefano DellaVigna, highlighted the altruists as those who gave money even when it was easy to avoid doing so. In an unexpected twist, the experiment straddled the collapse of Lehman Brothers and of the stock market. List and his colleagues discovered their “no-forewarning” run, which would normally attract grudging donations out of social pressure, raised almost two-thirds less money during the crisis. Perhaps it was just too easy to say no. Altruistic donations, solicited during the “forewarning” run, tended to be larger and held up better during the crisis.

Separately, List has found that large charitable donations such as bequests are strongly linked to stock market performance, but with a delay. The good news is that it may take time for the crisis to hit such donations. The bad news is that charities may suffer for years after the economy recovers.

All the economists I spoke to were pessimistic about the outlook for charitable giving in a recession. Rachel Croson, an economist at the University of Texas at Dallas, summed it up well by pointing out that in a recession, there is less of most things except spare time: “What I’m foreseeing is a lot of people volunteering to serve at the soup kitchen, but less food.”

Also published at ft.com.