The Relevance of Aid Effectiveness for Private and Public Donors - An Empirical Analysis

Since a considerable share of foreign aid is privately funded, private individual donors can increase social welfare in poor countries by giving to effective NGOs. Surprisingly few studies have analyzed whether private donors care about aid effectiveness when making a donation. Based on a laboratory experiment, we investigate if private donors seek information about a donation’s impact prior to making a donation. Furthermore, we investigate the relevance of information about aid impact compared to information on administrative costs, and the recipient type benefiting from a donation. First, we find that a minority of individuals, 29%, made a well-informed donation decision. Second, information about a donation’s welfare impact was least demanded, while information about the recipient type was most demanded. Third, information about a donation’s exact welfare impact did not lead to a significant change in average donation levels, while information about the exact recipient type and administrative costs led to a significant change in average donation levels. Individuals who were informed about the recipient type donated more than uninformed individuals, because they “rewarded” the preferred recipient with higher-than-average transfers. Individuals who were informed about administrative costs donated less than uninformed individuals, because they “punished” the NGO with high administrative costs. 12 2.1. Aid Effectiveness and Private Charitable Giving 2.1 Aid Effectiveness and Private Charitable Giving A large body of literature in experimental economics is dedicated to better understanding private charitable giving. One main strand of this literature studies why people gain utility from donating to charity. Andreoni (1990) developed one of the most applied and tested models of charitable giving, and coined the term “warm-glow” giving. A person who experiences pure “warm glow” derives utility from the act of giving, not from contributing to the provision of a public good. In contrast, a person who is motivated by pure “altruism” strives to maximize the supply of a public good. The model also defines the continuum of “impure altruism” along which individuals are motivated by both warm glow and altruism. Another main strand of this literature investigates which factors induce people to give (more). List (List and Lucking-Reiley 2002, Karlan and List 2007, Rondeau and List 2008) for example, has conducted a number of experiments to test which fundraising methods lead to an increase in donations and/or an expansion in the donor base, and hence to an increase in the supply of the public good. Usually, these studies implicitly assume that an increase in donations to a charitable good leads to an increase in the beneficiary’s welfare. However, this is not necessarily the case: public goods providers like international charities differ in how effectively they improve social welfare (Banerjee and Duflo 2011). We argue that whether private donors take into account (differences in) aid effectiveness when making a donation decision has important welfare implications. This question has received little attention in the experimental economics literature. On the other hand, research in development microeconomics, mostly based on randomized controlled trials (RCTs), has over the last decade considerably extended our knowledge about the effectiveness of aid interventions in increasing social welfare.1 However, the question if private donors (want to) use this knowledge to support more effective aid projects and organizations has received little attention in this discipline as well. This topic is important because private individuals provide a considerable and increasing share of foreign aid. According to OECD statistics, the share of private aid grants (private agencies and NGOs) in the official foreign aid (ODA) coming from DAC member countries rose by 28.6% between 2005 and 2013.2 In Switzerland, private charitable giving to the international aid sector stood at 443.1 million US Dollars in 2013, which amounts to 15.5% of Swiss official development aid.3 Thus, individual donors have quite some leverage in increasing the welfare of poor population groups in foreign countries by directing their funds to more effective organizations. A recent field experiment by Karlan and Wood (2014) is the only study we are aware of that analyzed the impact of information about aid effectiveness on the donation behavior of private donors. Karlan and Wood (2014) tested if individuals increase their donations to an international NGO when being informed that its activities effectively increase the welfare of its beneficiaries. They sent out three different fundraising letters to previous donors of an NGO that provides microcrediting services in low income countries. Participants in the control group received a donation appeal that described the story of a poor woman whose income the NGO had helped to increase. The first treatment group received a similar appeal, supplemented with the information that the NGO’s positive development impact has been scientifically proven. The second treatment group received the same appeal as the first treatment group with the additional information that Yale researchers, who had used a rigorous impact evaluation method, namely a randomized controlled trial, provided the scientific proof for 1The examples are numerous since every aid intervention is evaluated separately. For an overview of randomized controlled trials see The Abdul Latif Jameel Poverty Action Lab: http://povertyactionlab.org 2See the OECD data base: https://data.oecd. org/drf/grants-by-private-agencies-and-ngos.htm#indicator-chart 3See the Swiss Federal Department of Foreign Affairs: https://www.eda. admin.ch/deza/de/home/aktivitaeten_projekte/zahlen_und_statistiken/schweiz-apd/historischeentwicklung.html 2. Making an Impact? The Relevance of Information on Aid Effectiveness for Charitable Giving. A Laboratory Experiment. 13 the effectiveness of the NGO’s work. The results of their study suggest that donation behavior is, on average, not affected by providing information about aid effectiveness. Similar to Karlan and Wood (2014), we seek to study whether private donors care about aid effectiveness4 when making a donation decision. However, we take a different methodological approach and conduct a laboratory experiment to answer three specific research questions: First, we investigate if individuals actively seek information (by paying a small fee) about aid effectiveness when making a donation. By providing information at a cost, we consider the possibility that some donors may not be interested in making a well-informed decision. Andreoni’s (1990) theory for example predicts that pure warm glowers should not be interested in information about aid effectiveness, since they do not strive to maximize the beneficiaries’ welfare. Altruists, in contrast, should be interested in information. Moreover, in reality, acquiring information about the aid impact of international charities involves considerable search costs as well as cognitive effort, which may keep donors from making well-informed decisions. The two experiments that investigate whether individuals prefer to make informed donation decisions (none is on aid effectiveness) show that only a minority of donors is willing to acquire non-costless information about the precise use of their gift (see Null 2011 for the case of matching grants, and Fong and Oberholzer-Gee 2011 for the case of recipient types). Second, we investigate if and how the possibility to make a well-informed decision with regard to aid effectiveness influences donation behavior. Based on Andreoni’s theory (1990), and our experimental design, we would expect that well-informed donors have altruistic preferences and donate significantly more to the higher impact project. On the other hand, existing empirical evidence suggests this might not necessarily be the case. Studies by Fong (2007) and Fong and Oberholzer-Gee (2011) indicate that, depending on the decision environment, altruistic donors may not behave altruistically; Karlan and Wood (2014) show that information about aid impact does not alter donation behavior. Third, we analyze whether donors value information about aid impact more or less than other donation-relevant information, in particular information about the recipient type or administrative costs. Previous studies have shown that (cost-free) information about administrative costs and recipient types have a significant influence on private donation decisions (Gregory and Howard 2009, Borgloh et al. 2013, Bachke et al. 2014, Caviola et al. 2014). Based on survey data5, Gregory and Howard (2009) find that donors have downward skewed beliefs about how much overhead spending is necessary to guarantee an organization’s proper functioning. Moreover, the surveyed NGOs stated that they are under pressure to keep overheads low, which, in a number of cases, led to lower-than-necessary overhead spending and to underreporting administrative costs. Gregory and Howard (2009) furthermore report that the survey participants ranked “overhead ratio and financial transparency to be more important [. ] in determining their willingness to give [. ] than the success of the organization’s programs”. In a laboratory experiment conducted by Caviola et al. (2014) participants started donating more to less cost-effective charities, when the administrative costs of more cost-effective charities started to increase. Last, in a lab-in-field experiment conducted in Mannheim, Germany, Borgloh et al. (2013) found that participants donated more to financially smaller NGOs, because they believed these NGOs had smaller administrative costs, and hence provided more money directly to the charitable cause. 4The terms aid impact and aid effectiveness will be used interchangeably throughout the text. 5The survey was conducted by the Better Business Bureau’s Wise