Paul L. Caron

Sunday, March 9, 2008

NY Times: Moneyball and Charitable Giving

Interesting article in the Sunday New York Times Magazine:  What Makes People Give?, by David Leonhardt:

What makes people give their money away?  [John List and Dean Karlan] considered the usual answers (to make the world a better place, to see your name printed in the back of an annual report and the like) too pat, too simple — and sometimes just wrong. Over the years, whenever one of them asked fund-raisers why they did what they did, the responses were vague and unimpressive. There didn’t seem to be much empirical evidence to support the strategies employed by most fund-raisers. So the two economists wondered whether charities were wasting a lot of effort. ...

For a long time, philanthropy was mostly ignored by social scientists ...  Academics, for their part, have come to realize that charities provide an excellent laboratory for studying human behavior ... When charities are designing their donor appeals, they often go by nothing more than a few rules of thumb, some of which may be profoundly insightful and others a good deal less so. ...

As Michael Lewis (a contributing writer for this magazine) explained in his 2003 best seller, “Moneyball,” baseball executives spent years clinging to beliefs that were simply false. Only recently, thanks to the emergence of young executives who insisted on looking at data, had some of the myths been exposed. The research on charitable giving is still in its early stages, but is it possible, I wondered, that fund-raising would also prove to be riddled with inefficiencies? Absolutely, List replied. “I think most fund-raisers are doing this wrong.” ...

Richard Thaler, one of the behavioral economists List criticized in his sports-card paper, and Cass Sunstein, a widely published law professor, are coming out with a book next month called “Nudge.” It’s a manifesto for using the recent behavioral research to help people, as well as government agencies, companies and charities, make better decisions. ...

Each year, the federal government subsidizes charitable donations to the tune of about $50 billion a year. That is the value of tax deductions that the government gives out in exchange for donations. It’s a huge amount of money, more than enough to pay for, say, universal preschool for all 3- and 4-year-olds.

There are several reasons to question whether a subsidy of this size is such a good idea. Deductions of any kind complicate the tax code. This particular deduction disproportionately benefits the affluent, who have done quite well on their own in recent years. It also adds to the government’s long-term budget deficit. In an ideal world, the government would figure out a way to recoup some of this money without causing charitable giving to plummet. Philanthropies would be able to continue doing most of the good work they’re now doing without being quite such a drain on the federal budget.

Think back now to the central findings of List’s and Karlan’s research. People aren’t always clearheaded about money; sometimes the existence of a financial incentive can matter as much as its size. So what if it were possible to design a tax policy for charitable giving that wasn’t quite as generous as the current one but still led people to give nearly as much as they’re giving now? It wouldn’t be easy. As the original research on charitable giving suggested, people are often quite rational about their taxes — more rational, evidently, than they are about matching gifts. But it might not be impossible, and the potential benefits would be enormous. It’s the kind of problem that cries out for a clever field experiment by someone like John List.

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