Introduction

The emergence of entities the objective of which is to help donors make “smart” giving decisions suggests that donors are demanding more information on the efficiency and effectiveness of not-for-profits (e.g. see Saxton et al. 2011; Bekkers 2003, 2010); however, it is occasionally argued that donors do not use these tools to guide their giving decisions (e.g. Arumi et al. 2005; Sargeant 1999; Sargeant and Ford 2006; Sargeant and Jay 2010). If this were generally true, then the various means of charity quality assurance, such as charity watchdogs and disclosure-related regulation, would be wasted. We thus ask: How do donors decide about which charity to give to, and do donors use the charity price to guide their giving decisions?

To answer these questions, we construct a theoretical model that specifies the conditions under which the charity price influences donors’ giving decisions. A “utility function” is a way of capturing the (psychological) benefits the donor receives from giving. We assume the donor’s utility function contains three components: the stand-alone benefit from giving, the charity price (i.e. fundraising expenditure and overhead costs claimed by the charity providing servicesFootnote 1), and the information cost (i.e. the price the donor has to pay for information about the charity price), which may consist of effort cost as well as out-of-pocket expenses. The charity price describes the cost of purchasing charitable output. It increases when the charity uses more donations on fundraising and administration expenditure, as it means the donation is less able to purchase charitable output. We define the price of giving as the sum total of charity price and information cost.

The main insight from the model is that the typical donor faces a price–information trade-off, which occurs when she is not well informed about the charity price but wants to use it to guide her giving decisions. Since her search for information on the charity price is costly in terms of time, effort, and money, she might be willing to forego giving to the charity with the lowest charity price in order to decrease the price of giving.

The model contains three implications. First, the donor who faces the price–information trade-off adopts strategies to minimise the price of giving. Second, a charity that uses donations on fundraising and advertising expenses might receive more donations if they help decrease the information cost. Third, to the extent that the provision of information has a strong public-good component to it, our analysis suggests that publicly funding watchdog agencies or seals of approval might be beneficial.

The hypothesis that donors experience a price–information trade-off is tested by means of a literature review. Specifically, we verify whether donors care about the charity price and attempt to minimise the amount of cost associated with searching for it. The evidence seems to support the conjecture that this trade-off informs donors’ giving decisions.

In “The Theoretical Model” section we provide the theoretical model, and in “The Literature Review” section we provide our literature review. Concluding remarks follow in the “Concluding Remarks” section.

The Theoretical Model

The Basic Set-Up

To formalise how the price of giving informs donors’ giving, we use the concept of “utility” to explain what motivates an individual to behave a certain way. We assume the donor makes decisions that maximise her benefits net of charity price and information cost (i.e. “maximises her utility”). Her utility function consists of three components: the stand-alone benefit from giving (Component 1); the charity price (Component 2); and the information cost (Component 3). The interaction of these components determines the level of utility she receives from giving.

Component 1: Stand-Alone Benefit from Giving

Donors give to charitable causes for various reasons. She might give because she values the output provided by the charity (Vesterlund 2006), to feel the “joy of giving” (Andreoni 1990), or to fulfil a duty she believes the privileged are bound by (Sen 1977). For our present purpose, we simply assume the donor gives because she receives some form of benefit from doing so.

The donor’s willingness to give corresponds positively to the level of benefit she receives from doing so. If the donor prefers dogs to cats, for example, she most likely receives greater benefit from giving to a dog charity than to a cat charity provided all other factors, such as the information cost and the charity price, are equal. The term “taste” is used to describe the donor’s willingness to give to different charitable causes.

Component 2: Charity Price

Modifying Weisbrod and Dominguez (1986), the charity price reflects the proportion of donations the charity spends on producing charitable output. Namely, the charity spends a portion of every dollar worth of donations on administration and fundraising expenses. The charity price increases when the charity uses a larger portion of its donations on these expenses, as it means a smaller portion of donations is used to purchase charitable output, and vice versa. The price-sensitive donor dislikes giving to charities with a high charity price.Footnote 2

Component 3: Information Cost

The typical donor is not well informed about charities. If the donor cares about the charity price, she will exert effort to learn about the charity’s performance, which is the information cost. Her search to verify the price of giving, however, is costly in terms of effort, time, and money. She thus becomes unhappier as the cost of information acquisition increases.

The donor’s objective is to give to the charity that maximises her utility (Eq. 1). Her net utility increases when her stand-alone benefit from giving increases, and decreases when the price of giving and the cost of acquiring information increases.

$$ {\text{Net Utility}} = {\text{stand-alone benefit}} - {\text{charity price}} - {\text{information cost}} $$
(1)

Information is Perfect (Information Cost = 0)

We first assume that information is perfect—donors know the charity price for all charities. Component 3, the information cost, is thus absent from the present discussion, and charity price is thus identical to the price of giving. When information is perfect, charity price informs all giving irrespective of the type of taste the donor has. To illustrate, consider the donor with the following tastes:

Donor with Uniform Tastes

The donor with uniform tastes likes each charitable cause equally, and so receives the same amount of benefit from giving to each cause. The donor’s net utility from giving equals her stand-alone benefit from giving to a cause minus the disutility felt from the price of giving which equals in this case charity price. Since benefit is equal for all causes, she maximises her net utility by giving to the charity with the lowest charity price, as she experiences the least disutility from giving to it. The charity price informs the giving decisions of the donor with uniform tastes.

Donor with Peak-Shaped Tastes

A donor with peak-shaped tastes prefers one cause above all other causes, and so receives greater benefit from giving to her favourite cause rather than the alternatives. Suppose the donor only wishes to give to dog charities. She has the same stand-alone benefit from giving to any charity that supports stray dogs. Since, based on stand-alone benefit alone, she cannot distinguish which charity to give to but possesses information on charity price, she uses price to discriminate among them. She maximises her utility by giving to the charity with the lowest price, for it generates the least disutility.

Hypothesis 1

When a cause is supported by many charities and information is perfect, the charity price, which is also the price of giving when information is perfect, informs all giving, regardless of the taste of the donor.

Since donors give to the charity with the lowest price, charities are forced to produce output at the lowest price, lest they lose donations to charities that provide the same goods at a lower price. The charity market thus converges to a perfectly competitive market, as charities compete for donations through price.

Information is Imperfect (Information Price ≠ 0)

The charity market is imperfect due to information asymmetries—donors typically do not know the charity price and charities have better information about their price than donors (Ortmann and Schlesinger 2003). We thus assume that information is imperfect to move the model closer to reality. To allay information asymmetry, the price-sensitive donor might exert effort to search for charities’ key financial and performance-related indicators, incurring an information cost in terms of time, effort, and money. She hence might experience disutility from searching. This price–information trade-off is illustrated in the following scenarios.Footnote 3

Scenario 1: The Donor Strongly Dislikes Searching for Charities’ Charity Price

The donor who has high information cost does not search for the charity price. If her stand-alone benefit from giving to her favourite cause is greater than the expected disutility from giving to a charity, she gives to any charity that supports her favourite cause(s). If her stand-alone benefit from giving to her favourite cause is smaller than the expected disutility from giving to a charity, then she does not give.

Scenario 2: The Donor Strongly Dislikes Giving to a Charity with a High Price

For the donor who experiences large disutility from giving to a charity with a high charity price, if her stand-alone benefit from giving to her preferred cause is large enough, she will look for the charity price regardless of the information cost. If her stand-alone benefit from giving to her preferred cause is low, she will not search for the charity price and not give.

Scenario 3: The Donor Finds Ways to Decrease the Information Cost

Depending on the donor’s aversion to effort, she might exert effort to find more information on charity price. For the donor who is willing to exert effort because she values the charity price, ratings by charity watchdogs and/or certification agencies’ seals of approvals would act as an appropriate mechanism to help guide her giving decision, while decreasing the information cost associated with acquiring information on them.

The scenarios illustrate three implications of the price–information trade-off:

  1. 1.

    A donor might appear to let her “taste” cause her to give indiscriminately to charities; however, her giving might be due to her aversion to information cost. For example, suppose the donor’s favourite cause is dogs, and she is only aware of one charity that supports dogs. If the donor faces the price–information trade-off and believes (possibly falsely) the charity has a low price, she might still give to it.

  2. 2.

    Fundraising expenses might increase donations if they decrease the donor’s information cost. Fundraising thus has countervailing effects on giving. It increases the charity price, which decreases the donor’s willingness to give, but it also decreases the information cost by increasing the charity’s name recognition, which may lead to greater donations.

  3. 3.

    The donor who faces the price–information trade-off would welcome tools that help minimise the information cost, such as ratings by charity watchdogs and/or certification agencies’ seals of approvals.

Hypothesis 2

When many charities support a single cause and information is imperfect

  1. A.

    A donor that faces the price–information trade-off might behave like a donor who does not care about the charity price;

  2. B.

    Raising the profile of the charity through fundraising expenditure can increase donations; and

  3. C.

    Donors who face the price–information trade-off would welcome shortcuts to minimise the amount of costly effort associated with searching for charities’ price of giving (charities’ price).

Hypothesis 2 raises an important policy issue concerning the possibility that fundraising and advertising is a social waste and that information acquisition could be better achieved through charity watchdogs and/or seals of approvals. These bodies would be less self-serving and, due to the public-good aspect of information, more cost-effective; they might also increase the quality of charities on average (e.g. Svitkova 2013 and literature review therein).

The Literature Review

We review studies that address components 2 (i.e. the charity price) and 3 (i.e. information cost) of the utility function to assess whether donors use charity price to inform their giving decisions and/or whether they try to reduce the information cost.Footnote 4

Do Donors Care About the Charity Price?

In the model, if the donor cares about the charity price and wants her dollar contribution to maximise charitable output, charities with a lower price are rewarded with higher donations. Using a desk-based search of the literature, survey and empirical evidence were reviewed to verify whether this assumption reflects reality.

Survey Evidence

Table 1 contains a summary of the survey findings. The evidence suggest that donors are hetergeneous—some value charity price and use it to guide their giving, whereas others do not. Most donors from Arumi et al. (2005), for example, reported they did not research their beneficiary charity before or after they gave nor were they interested in the financial details of charities. However, they displayed price sensitivity, as they diverted their donations from United Way and Red Cross to other charities once news of the misuse of donations emerged. In contrast, donors from Barclays Wealth (2010) claimed they often used efficiency metrics to guide which charity they gave to (but see Hope Consulting 2010).

Table 1 Summary of responses
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Moreover, non-donors do not give, and donors do not give more, if they believe their donations will not be used efficiently (Madden 2006; Lasby 2004). Specifically, Bagwell et al. (2013) calculated that donors would donate an additional £663 million if charities could better explain how donations were used and provided evidence of impact.

Observation 1 Based on the survey evidence

  1. (1)

    Donors claimed they use charity price to inform the charity they give to; however, the extent to which donors use price to guide their giving decision varies.

  2. (2)

    Some donors claim to search for metrics to guide their giving, whereas others do not. Donors nonetheless tend to stop giving if a charity is reported as having misused donations.

The survey methodology has important limitations. Surveys that focus on a subgroup might provide a biased sample of the population. Surveys can be subjective, as one person’s perception of efficiency or effectiveness might be different from another’s (Borgloh et al. 2013, 2010). As demonstrated in Buchheit and Parson’s (2006) experiment, respondents’ self-reported behaviour may not match actual behaviour. In their study, all subjects were given a charity fundraising request, while roughly half were given additional service efforts and accomplishment (SEA) information.Footnote 5 Based on the survey taken by the subjects, those who received SEA information were more likely to make a future donation to the charity than those who received the basic fundraising request. However, when given the choice to give $2 to the charity or keep a pen, subjects who received the SEA information were more likely to keep the pen than subjects with the basic fundraising request.

Empirical Evidence

Simplifying Weisbrod and Dominguez’s (1986) price-of-giving model, the donor purchases chariable output in dollar amounts.Footnote 6 For every dollar contributed to the charity’s output, a portion is spent on other expenses, such as fundraising and administration. When the portion spent on other expenses increase, the donor’s dollar contribution buys less charitable output. The charity price (PRICE) thus increases as it costs more to purchase a dollar’s worth of charitable output. The model is formalised in Eq. (2):

$$ {\text{PRICE}} = 1/(1 - f - a) $$
(2)

where f and a represent fundraising and administrative expenses, respectively.

Table 2 summarises the results from studies that test the relationship between PRICE and donations. Column “PRICE variable” contains accounting ratios that are based on Eq. (2). Column “PRICE” contains the qualitative effect of the PRICE variable on donations. Symbol “+” denotes the PRICE variable and donations are positively correlated—donors give more to charities that have a higher price of giving. Symbol “−” denotes the PRICE variable and donations are negatively correlated—donors give less to charities that have a higher price of giving, or more precisely a higher charity price since none of the studies controls for the information costs. “0” denotes the PRICE variable having a statistically insignificant effect on donations. If donors want their dollar contributions to maximise the charity’s output, “−” should be observed across the PRICE column. The “Fundraising” column is addressed later.

Table 2 Summary of findings
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Observation 2 PRICE and donations are negatively correlated in most studies (but see Frumkin and Kim 2001; Marcuello and Salas 2001; Greenlee and Brown 1999; Chen 2009).

Observation 2, however, is open to interpretation. Specifically, the negative effect of PRICE on donations suggests that donors are price sensitive, but the positive effect of fundraising on donations suggests that giving increases when charities increase expenditure on fundraising, such as through soliciting donors more frequently or with better quality. We elaborate on this issue in “Do Higher Fundraising Expenses Correspond to More Giving?” section of the paper.

Moreover, these results depend on the econometric tools that are used, the data analysed, and the regulatory framework imposed at the time of analysis (e.g. see Krishnan et al. 2006; Tinkelman 1999; Tinkelman and Mankaney 2007; Yetman 2009). Tinkelman and Mankaney (2007), for example, replicated the regressions in Posnett and Sandler (1989), Greenlee and Brown (1999), and Frumkin and Kim (2001) with different data sets to verify the effect of the administration ratio on donations. Consistent with Greenlee and Brown (1999) and Frumkin and Kim (2001), a higher administrative ratio corresponded to greater donations. However, when the same regression was conducted with “relevant and reliable” data,Footnote 7 the effect became negative. When they replicated Posnett and Sandler’s (1989) study, a higher administrative ratio corresponded to greater donations, regardless of the data’s quality. The authors posit that this result was driven by the less “relevant” nature of the dataset, as it contains less donor-reliant organisations than other datasets.

Do Donors Minimise Information Cost?

We predicted that donors who experience the price–information trade-off care about the charity price but dislike exerting effort, and so use “rules of thumbs”, signals, and rating or certification agencies to gauge the charity price and guide their giving decisions. We also predicted that charities with higher fundraising expenses might receive more donations, as it decreases the information cost.

Do Donors Use “Rules of Thumb” to Guide Their Giving Decisions?

Donors sometimes use “rules of thumb” to gauge the charity price and minimise effort. For example, although donors from Arumi et al. (2005) rarely researched their beneficiary charity before or after giving, and donors from Breeze (2010) often could not recall the charities and causes they supported, respondents from both studies often applied “rules of thumb” to gauge the quality of the charity, such as whether they recognised the charity’s name (“recognition heuristic”; see Gigerenzer and Todd 1999), how many people volunteered at the charity, or whether they received a newsletter detailing the charity’s accomplishments.

Donors might also reduce the amount they give if they suspect their donations were used on expenses extraneous to the cause. In Bekkers and Brutzen’s (2007) experiment, for example, donors who received the fundraising campaign letter in “plain” envelopes were more likely to give, and at higher amounts, than donors who received the fundraising campaign letter in “flashy” envelopes. Similarly, in Landry et al.’s (2010) experiment, individuals were offered either nothing, a small gift, or a large gift for giving to a Hazards Centre. Individuals who previously gave to the Centre were more likely to give when they were not offered a gift.

Charities can even signal their quality by providing more information on itself. Saxton et al. (2011) found that charities that disclosed more financial and performance-related information on their website received more donations than those that disclosed less. Aguiar et al. (2008) found that individuals are more willing to give to a charity when they know who their beneficiary is and how exactly their donations would be used (also see Branas-Garza 2006). Most subjects in McDowell et al.’s (2010) experiment, in contrast, gave to the charity once they read about its mission and goals, and without reading its program ratio.

Charities can adopt “announcement strategies” to decrease donors’ information cost. Specifically, by announcing the receipt of a large donation to the public, the charity provides a signal to potential donors that the benefactor gave because s/he believes the charity is trustworthy (Vesterlund 2003). The donor who faces the price–information trade-off might respond to this strategy if it helps minimise the information cost and gives her confidence that her donation will go to an adequate charity.

An example of an announcement strategy is “matching”, where a lead donor matches the donations of other donors at a given rate, up to a maximum amount. Karlan and List (2007) studied the matching strategy by sending a fundraising letter to over 50,000 prior donors about a liberal organisation. Donations were either not matched, or matched where the lead donor gave 1, 2, or 3 dollars to the organisation for every dollar donated. They found that donors in the matched treatments were more likely to give, and gave more, than donors whose donations were not matched (see Karlan et al. 2011 for a similar study, but also see Rondeau and List 2008, for contradictory results).

Another announcement strategy is a “challenge gift”, where a donor commits to giving a set amount of money to a charity, can also influence giving. List and Lucking-Reiley (2002) demonstrated this by asking 3000 Central Florida residents for donations to the Centre for Environmental Policy Analysis. They found that increasing the level of the challenge gift contribution from 10 to 67 % of the campaign goal resulted in nearly a sixfold increase in overall donations (also see Rondeau and List 2008).

Observation 3 Some donors use rules of thumb, such as charities’ level of spending on expenses and the level of information they provide on themselves, to guide their giving decisions.

Do Donors Use Agencies to Inform Their Giving Decisions?

Watchdog agencies provide information to donors about the quality of charities. For example, Charity Navigator rates charities out of 4 stars, the American Institute of Philanthropy (AIP; now called CharityWatch) rates charities from A + to F, and Better Business Bureau (BBB) Wise Giving Alliance in the US, Central Bureau Fondsenwerving (CBF) in the Netherlands, and Deutsches Zentralinstitut fuer soziale Fragen (DZI) in Germany award accreditation seals to charities that comply with their standards. Typical standards include whether financial statements are audited and the proportion of donations spent on fundraising and administrative expenses (Ortmann and Svitkova 2007). By meeting or performing well against these standards, charities demonstrate that they use donations responsibly.Footnote 8

Based on the theoretical model, donors who face the price–information trade-off use these agencies to reduce the information cost and ensure their donations are used appropriately. They are more likely to give to accredited charities, or charities with high ratings, than to charities that either are not accredited or have low ratings.

Table 3 summarises the findings from studies that examine the relationship between ratings and giving. The “Increase (Pass)” column contains the qualitative effect of an increase in rating (e.g. from C to C+; two stars to three) or a pass rating on giving. Symbol “+” means an increase in rating or a pass rating corresponded to more giving; symbol “−”means a decrease in rating or a fail rating corresponded to less giving; and “0” means the effect was statistically insignificant. The “Decrease (Fail)” column contains the qualitative effect of a decrease in rating or a fail rating on giving. Symbol “+” means that a decrease in rating or a fail rating corresponded to more giving; symbol “−” means that a decrease in rating or a fail rating corresponded to less giving; and “0” means the effect was statistically insignificant. If donors face the price–information trade-off, column “Increase (Pass)” should contain symbol “+” and “Decrease (Fail)” should contain symbol “−”.

Table 3 Effect of agencies on donations
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Donors generally used agencies to inform their giving, although not all studies showed that highly rated and/or accredited charities were rewarded with more donations. This can be explained using the theoretical model. Namely, the financial details of most charities in Berman and Davidson (2003) were not publicly available at the time of the analysis. The accountability rating would thus not affect donations if the information search was too costly. Silvergleid (2003) found that the AIP quarterly ratings had an insignificant effect on donations. Since AIP rates charities on a scale of A+, A, A−, …, F, the “decrease” in rating from A to A- might not be steep enough to induce donors to search for charities with a lower price. Lastly, Sloan (2009) conjectured that “did-not-pass” ratings did not correspond to lower donations, as charities that did-not-pass were not obligated to publish the result on their websites. Since donors have to search the Wise Giving Alliance database to determine whether the charity passed, the information search might also have been too costly.

Observation 4 Although the evidence is mixed, it appears that highly rated or accredited charities tend to receive more donations than lower rated or unaccredited charities.

Cnaan et al. (2011), in contrast, noted that watchdog agencies are not widely used. Using the responses from three waves of the Harris Poll Online Panel (HPOL), they found that most donors (77.7 %), bar those engaged in advocacy or systematically making large donations, do not use watchdog ratings. The authors thus question the relevance of watchdog agencies to the average donor, and argue that they are either unaware of them, or do not care about the quality of charities (Horne et al. 2005; but also see Bekkers 2003, 2010; Svitkova 2013 and the evidence therein).

In contrast, Bekkers (2006) shows that knowing about accreditation seals can lead to greater trust in, and giving to, charities. Using the first two waves of the Giving in the Netherlands Panel Survey (2002–2004), he found that awareness of the accreditation seal is positively related to confidence in the not-for-profit sector, and that those with no/little confidence in the sector gave 130 Euros per year, those with some confidence gave 257 Euros per year, and those with quite some/very much confidence donated 393 Euros per year.

Do Higher Fundraising Expenses Correspond to More Giving?

Based on the model, fundraising expenses can have countervailing effects on giving (Okten and Weisbrod 2000). For the price-sensitive donor, higher fundraising expense decreases giving. For the donor who dislikes information cost, higher fundraising expenses increases giving as it raises the profile of the charity and decreases costly information search.Footnote 9 The total effect of fundraising on giving thus depends on which force is stronger.

Column “Fundraising” in Table 2, “Do Donors Use Agencies to Inform Their Giving Decisions?” section, contains the qualitative effect of charities’ fundraising expense in the previous year on donations. “+” means fundraising expense and donations were positively correlated, as donors gave more to charities with higher fundraising expenses; “−”means they were negatively correlated; “0” means the effect was statistically insignificant, and “N/A” means it was excluded from the study. For evidence that suggests donors face the price–information trade-off, “+” should be observed across the Fundraising column and “−”should be observed across the PRICE column, for it implies that donors used fundraising as a way to glean more information on charities with minimal effort, or received better information on charities through more effective fundraising activities, but were price sensitive as they gave less as the charity price increased.

17 of the 23 studies reviewed in the “Empirical Evidence” section provide evidence in favour of the price–information trade-off. Namely, fundraising expenses had countervailing effects on giving—the direct effect of fundraising expense increased giving, while the indirect effect through the charity price decreased donations.

Observation 5 Based on the studies reviewed in the “Empirical Evidence” section, charities that spent more on fundraising expenses in the previous year received greater donations in the current year, however, charities with a greater price received less private donations.

Note that the countervailing effects of fundraising expenses on donations cannot be distinguished in archival and survey data. As such, the interpretation of the effect of fundraising expenses on giving is debateable. For example, although higher fundraising expenses can increase giving through reducing the information cost, it might also be the result of charities using more sophisticated solicitation mechanisms (e.g. see Wiepking 2010; Bekkers and Wiepking 2011) and better designed fundraising drives (Pallotta 2013).Footnote 10 A carefully designed experiment, however, could disentangle these two effects.Footnote 11 Specifically, the experimenter could hold specific design elements constant (such as the number of times the donee is solicited), while varying one element (such as fundraising expense). Causation can be inferred if the variation of the one element is accompanied with greater giving.

Concluding Remarks

We set out to understand how donors decide about which charity to give to, and whether they use the charity price to guide their giving decisions. Specifically, we were interested in the merits of the claim that donors do not use quality-assurance entities such as charity watchdogs to help donors make “smart” giving decisions (e.g. Arumi et al. 2005; Sargeant 1999; Sargeant and Ford 2006; Sargeant and Jay 2010). If this were generally true, then the various means of charity quality assurance would be wasted. We thus asked: How do donors decide about which charity to give to, and do donors use the charity price to guide their giving decisions?

To this end, we proposed a theoretical model to explain the conditions under which taste, charity price, and information cost inform giving decisions. The central insight from the model is that giving decisions might be informed by a price–information trade-off, where donors care about the charity price, but are averse to searching for it because they dislike exerting effort and thus incur an information cost. In consequence, donors might seek ways to minimise the information cost. Simultaneously, charities that spend more money on fundraising costs might generate more donations than those that do not, as they are able to raise their profile and reduce the information price.

We reviewed the literature to test the explanatory power of the theoretical framework. The evidence suggests that donors generally care about the charity price but also seek to minimise the information cost. This supports the hypothesis that the price–information trade-off can affect donors’ giving decisions.

If the price–information trade-off does inform giving decisions, we suggest for policy-makers and academics to explore the role of information cost on donors’ giving decisions. In particular, measures that can reduce the information price, such as certification or watchdog agencies, may be beneficial for donors to whom the price–information trade-off matters. These agencies guarantee that charities with a seal of approval or a specific rating spend an appropriate amount on expenses that do not contribute to producing charitable output. Due to the public good nature of information, a central agency that provides information on all charities’ price would be more cost effective than individual charities revealing their price metric individually, or publicising themselves through costly fundraising and/or advertising. For this to work, these portals need to be widely publicised and trusted. If successful, the information asymmetry problem afflicting charities will be allayed and the charity market will move towards a more competitive model where donations flow to charities with a lower price, at least in theory.

Although our central hypothesis—donors care about charity price and information cost, can be explained by the literature—it is unclear which of the two a typical donor cares about more—the charity price or the information cost. If the former, policy-makers could encourage greater efficiency and effectiveness among charities in line with our prior recommendation. The more involved policy-maker and researcher could also consider how different types of charity prices (e.g. fundraising expenses which are signalled through pamphlets or celebrity endorsements, or through financial reports) influence the giving patterns of different types of donors (e.g. regular versus intermittent givers; givers versus non-givers; wealthy givers versus average givers). If the latter, policy-makers face additional problems—is the information cost problem better attenuated through the presence of watchdog agencies or sophisticated fundraising drives? In fact, what exactly brings about the information cost? Is it the number of solicitations received by the giver, the minutes of television airtime the charity receives, or the number of celebrities that endorse the charity? Indeed can the charity sector ever mimic a competitive market if there are these “frictions”? Our model allows us to formulate the basis of several testable hypotheses which could be explored if the policy-maker believes that expanding the pool and creating a more efficient and effective allocation of resources in the charitable sector is important.