Tuesday, December 01, 2015

Giving Tuesday: No One Wants to Fund Overhead Expenses

Few people enjoy donating to charities which have a high administrative expense ratio.  We prefer that our money goes directly to people in need, rather than to fund overhead expenditures.  Uri Gneezy, Elizabeth A. Keenan, Ayelet Gneezy have written a paper on the subject.  Their paper, "Avoiding Overhead Aversion in Charity" was published in Science last fall.  

They conducted an interesting field experiment to examine how people would behave with respect to donations to a large education foundation's new initiative.   Approximately 40,000 people received requests to donate to this foundation.  They split the population into four groups, with each receiving a different letter.  One group received a letter indicating that one donor had already made a $10,000 contribution to the foundation to launch this campaign.  A second group received a letter indicating that someone had offered to match donations up to a total of $20,000.  A third group received a letter indicating that someone had contributed money to cover all overhead expenses for this new initiative.  Finally, the fourth group represented the control for the study.  They simply received a generic letter with information about the foundation's request for funds.  

What did the scholars find in this field experiment?  A significantly higher percentage of people in the "overhead-free" group donated to this cause.  Moreover, they donated three times as much as the people in the control condition, and nearly twice as much as the next highest group.   The findings are quite interesting.  Certainly, nonprofits can try to keep overhead expenses low.  However, some administrative expenditures are necessary.   Having a donor who is willing to fund those costs can make it much easier to raise money from every other potential donor. 

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