Peer Effects on Charitable Giving: How Can Social Ties Increase Charitable Giving Through Cognitive Dissonance?

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1 Russell Ackoff Doctoral Student Fellowship for Research on Human Decision Processes and Risk Management 2015 Application Peer Effects on Charitable Giving: How Can Social Ties Increase Charitable Giving Through Cognitive Dissonance? Zheng Jai Jennie Huang First Year Doctoral Student Wharton Business Economics and Public Policy Department Faculty Advisor Katherine Milkman, OPIM Department Requested Support: $

2 Background Standard economic theory describes people as rational individuals who are purely selfish and only care about their own wealth and utility (Samuelson, 1954). Contrary to theory, charity organizations constitute a multi-billion dollar industry (Urban Institute, 2013). Moreover, findings in economic lab and field experiments suggest that there are other regarding preferences that affect an individual s contributions to public goods (Andreoni, 1988, 1989, 1990; Andreoni and Petrie, 2004; Levine, 1998; Rege and Telle, 2004). Nevertheless, the effects of social ties and peer effects on public goods contributions remain poorly understood. There are several different definitions of social ties. However, it is agreed upon that social ties are closely correlated to trust and reciprocity. In economics, social distance is the degree of reciprocity that subjects believe exists within a social interaction (Hoffman et al., 1994, 1996). In sociological literature, social ties are information-carrying connections between people where the strength of a tie is a (probably linear) combination of the amount of time, emotional intensity, the intimacy (mutual confiding), and the reciprocal services which characterize the tie (Granovetter, 1973). Under these definitions of social ties, strong ties are the people you trust while weak ties represent acquaintances. Furthermore, prior research by Berg et al. (1995) shows that trust and reciprocity can affect the amount of money sent in an investment setting. Although Nash equilibrium predicts that zero money should be sent, results showed that 30 of 32 subjects sent money or invested. This implies that social ties and trust can increase people s tendency to invest. With the present advancement of technology, social media has not only expanded an individual s social network but also the spread of information. Charities and nonprofit organizations have already started using individual s social ties and social media to expand their network. Many will enter donors into a raffle if they refer friends and their referrals donate to the charity. Others will use Facebook or Twitter to advertise their own personal charities or nonprofits to increase exposure. An example of individuals utilizing social ties and social media to increase donations includes individual teams trying to raise funds for bigger charities such as Breast Cancer Awareness. Every year, the Avon Foundation for Breast Cancer will host a marathon where individual teams will try to raise funds for the foundation. Said teams participating have the option to their friends or post on Facebook and ask for donations with a few simple clicks. How does sending an asking for donations to someone you personally know change your tendency to donate? Understanding how social ties affect contributions will enable charities and policy makers to use these findings and apply them in their respective industries to increase contributions to public goods and reduce free-riders. Knowing how social ties can influence people s economic 1

3 decisions can have a tremendous impact not only on donations to charities but also in the adoption of policies such as environmental awareness. In our current research we seek to understand the effects of the strength of social ties on charitable giving. Prior research has already shown that social ties between group members have a positive effect on investment. We posit that making charitable requests of those with whom one has social ties of varying strengths may elicit different degrees of internal commitment (by eliciting cognitive dissonance to a greater or lesser degree). For instance, asking strong ties for support may increase internal commitment less than asking weak ties for support, for instance. Experimental Design Dr. Judd Kessler, Dr. Katherine Milkman, and I aim to explore the relation between social ties and cognitive dissonance and its effects on charitable donations by conducting a series of lab experiments where we vary the degree of social ties as well as the observability of the donation amounts. We will begin the experiment by randomly assigning subjects to one of nine treatment groups. An initial screen will convey to the subjects that they will be asked to compose an to a friend, acquaintance or random stranger asking them to donate to a pre-selected charity. The subjects will then elect to opt-in or opt-out of the experiment. If the subjects select to opt-in, they will be prompted to a window where they will compose a personalized . Afterwards, the subjects will be told that their will not be sent, will be sent, or will be sent and we will also reveal to the amount they donate to the receiver of the . Finally we will ask if they wish to donate to the charity organization. These nine treatments will test the relationship between social ties and charitable giving. Once the lab experiment has confirmed our hypothesis, further research on this matter would include expanding this study to the field. Field experiments provide additional insights in real world scenarios that may not be observed in more simplified lab experiments. For these studies we will use Qualtrics and lab subjects at a cost of $1.50 per subject, for 9 studies, which would amount to approximately $3,375 in support for subject payment. It is my hope that the Ackoff Fellowship will allow me to pursue these lab studies and attend the Science of Philanthropy Initiative Third Annual Conference in Chicago. 1 I thank you for your consideration of this proposal. Please feel free to contact me if you have any questions. 1 The Science of Philanthropy Initiative (SPI) is a research project, funded by the John Templeton Foundation, seeking to further understand the social preferences that shape philanthropic giving. The Conference presents current research on charity economics. See < 2

4 Requested Support Table 1: Budget of Anticipated Expenses Item Cost per Unit Number Total Subject Payment $ $3, SPI 2015 Conference Registration $ $0.00 Travel Expenses $ $ Hotel $ $ Total $

5 References Andreoni, James (1988), Why free ride? strategies and learning in public goods experiments. Journal of Public Economics, 37, Andreoni, James (1989), Giving with impure altruism: Applications to charity and ricardian equivalence. The Journal of Political Economy, 97, Andreoni, James (1990), Impure altruism and donations to public goods: A theory of warmglow giving? Economic Journal, 100, Andreoni, James and Ragan Petrie (2004), Public goods experiments without confidentiality: A glimpse into fund-raising. Journal of Public Economics, 88, Berg, Joyce, John Dickhaut, and Kevin McCabe (1995), Trust, reciprocity, and social history. Games and Economic Behavior, 10, Granovetter, M.S. (1973), The Strength of Weak Ties. The American Journal of Sociology, 78, Hoffman, Elizabeth, McCabe Kevin, Shachat Keith, and Vernon Smith (1994), Preferences, property rights, and anonymity in bargaining games. Games and Economic Behavior, 7, Hoffman, Elizabeth, Kevin McCabe, and Vernon L Smith (1996), Social distance and otherregarding behavior in dictator games. American Economic Review, 86, Levine, David K. (1998), Modeling altruism and spitefulness in experiment. Review of Economic Dynamics, 1, Rege, Mari and Kjetil Telle (2004), The impact of social approval and framing on cooperation in public good situations. Journal of Public Economics, 88, Samuelson, Paul A. (1954), The pure theory of public expenditure. The Review of Economics and Statistics, 36. Urban Institute, National Center for Charitable Statistics (2013), Quick facts about nonprofits. URL 4