Signaling quality through gifts: Implications for the charitable sector

Abstract

A popular belief amongst fund-raisers is that potential donors are more generous when provided gifts as part of the solicitation request and there is a growing body of experimental research supporting this belief. To date, such behavior has been modeled through the lens of gift-exchange and reciprocity. We provide an alternate rationale for gift-giving by nonprofit organizations based on the signaling model of Spence (1973). We first show that in the presence of uninformed donors there exists a separating equilibrium under which high quality charities expend scarce resources to signal quality and receive higher donations. We then explore how gift-giving and competition amongst charities impacts net public good provision. In doing so, we highlight a perverse effect – competition amongst charities can lead to lower public good provision when the likelihood a charity is of high quality is high and/or when the difference in quality across high and low type firms narrows.