THE HABIT OF GIVING

I. INTRODUCTION Habit formation is thought to exert great influence on behavior. It has been proffered as a potential answer to questions as disparate as the size of the equity premium (Abel 1990), optimal purchases of insurance (Ben-Arab, Briys, and Schlesinger 1996), labor force participation (Woittiez and Kapteyn 1998), the relationship between savings and growth rates (Carroll, Overland, and Well 2000), responsiveness to monetary policy (Fuhrer 2000), the importance of brand loyalty (Gupta, Chintagunta, and Wittink 1997), and the existence of a "gateway" effect between alcohol and illegal drug use (Pacula 1998). Yet there is scant discussion in the economics literature about long-term habit forming. Most studies focus on shorter-term intertemporal relationships, like changes in annual consumption (see, inter alia, Naik and Moore 1996; Dynan 2002; Carrasco, Labeaga, and Lopez-Salido 2005). The importance of early influences on later risk taking (Malmendier and Nagel 2007) and motivations for purchasing different goods (Portolese-Dias 2004) has been hypothesized. Yet there is little direct evidence on the long-term impact of shocks to behavior early in life, particularly in the way that preferences form and evolve. One recent exception is the study of Bronnenberg, Dube, and Gentzkow (2010), who use variation in consumers' previous states of residence to show that early exposure to particular brands of package goods affects purchasing behavior decades later. Charities, in particular, care about building relationships with their donors and expend a great deal of effort in the pursuit of small gifts, with the expectation that they may lead to larger gifts in the future. Universities seem to be convinced that this strategy is effective, and with $8.7 billion raised from alumni in 2008, the stakes are high (Council for Aid to Education 2009). The dean of alumni affairs at Columbia University stated that "it isn't about the dollars," and that the purpose of getting young alumni to donate is to create a habit of giving (Durkin 2005). Fundraising professionals agree--one consultant explained, "I would never say that a small gift is not important because it's building that relationship. If you don't build those relationships today, you may not have their interest when the day comes that they can give those $101 million donations" (Westmoreland 2008). This sentiment was echoed by an expert on senior class giving at the Council for Advancement and Support of Education, who explained that "the goal [of these programs] is not to raise money, but to begin a pattern of behavior" (Ensign 2010). There is scant evidence that this belief is justified. While a number of studies have documented a positive correlation between giving when young and giving when older (see Monks 2003; Turner, Meserve, and Bowen 2001), this may be driven by a number of factors that have nothing to do with building a relationship. This correlation may actually represent spurious state dependence that arises from unobserved heterogeneity--like the alumnus's affinity for the school. This is contrasted with true state dependence, in which a donation in one period affects preferences for donating in a later period. While participation rates are a factor in university rankings, it seems evident that development officials assume that habit-forming in charitable contributions exists and justifies the pursuit of small gifts when alumni are young, with the expectation that this will lead to larger gifts in the future. These beliefs hinge on the idea that a habit can form by the simple act of making a gift, and that the amount given is possibly irrelevant. In essence, the proponents of this idea believe that giving regularly when young will cause the individual to be in a state of "focus" for giving when older--willing to make a larger gift, perhaps because they are accustomed to giving to the charity in each year. Standard models of habit forming, in which the amount given in an earlier period affects a stock variable and the individual incurs disutility from deviating from this level, do not account for this phenomenon. …