Charitable Donations and Matching Gifts

The US charitable donation tax deduction was enacted in 1917 and has become an important deduction mechanism for taxpayers. The aggregate amount of tax deductions in the United States from 2001 to 2005 was estimated to be $145 billion (Colombo, 2001).

 

There is an increase of literature pointing out about the positive impact of community-based initiatives as the civil sector has proven its ability to deliver public goods and services cost-effectively while assuring accountability and transparency. Moreover, private giving to charities has significantly grown in the past decades.

 

By 2002, donations in the United States were 2 percent or more of the country's GDP with 89 percent of Americans giving to charities (Sullivan, 2002). According to the US Bureau of Economic Analysis, by 2014, the NGO sector share of the GDP was 5.3% in the United States (Salamon, Sokolowski & List, 2003).

 

Among the tactics commonly used by fundraisers to solicit donations are matching gifts. A matching gift is a commitment by a donor to match the contributions of others at a given rate, up to the maximum amount the leadership donor is prepared to provide ("Effect of Matching Ratios on Charitable Giving in the United States" | The Abdul Latif Jameel Poverty Action Lab," 2017).

 

While the rate of a matching gift is typically the result of an agreement between the fundraiser and the donor, fundraisers, anecdotally, note that increases in the 'matching rate' have the power to influence contributions.

 

To evaluate this claim, researchers explored the importance of price on charitable giving by randomly varying the rates of matching gifts and measuring the subsequent effect on donations. The evaluation consisted of using a sample of 50,000 individuals who had previously contributed to a charitable organization and observing their responses during 2005.

 

Researchers found that matching gifts were an effective fundraising tactic, increasing the likelihood of total contributions as fundraisers claimed. However, larger match ratios did not return more donations than smaller match ratios ("Effect of Matching Ratios on Charitable Giving in the United States" | The Abdul Latif Jameel Poverty Action Lab," 2017).

 

The randomized evaluation conducted by one of J-Pal's affiliates was carried as follows:

 

Individuals received identical letters except by two things: (1) the treatment letters included an announcement stating that a "concerned fellow member" would match their donation, and (2) the reply card included the details of the match.

 

The letter suggested the donor equal the ratio of the donation by 1:1, 2:1 or 3:1 (the 2:1 ratio means, for example, that for every dollar the individual donates, the matching donor contributes $2). The maximum size of the matching gift across all donations were $25,000, $50,000, $100,000, or unstated (Karlan & A. List, 2012).

 

The example donation with the amount suggested was as follows:

1. The individual' s highest previous contribution,

2. 1.25 times the highest previous contribution, or

3. 1.5 times the highest previous contribution.

 

The results indicated that by announcing that match money was available, donations considerably increased the revenue per solicitation by 19 percent. The matching offer increases the probability that an individual chooses to donate by 22 percent. This finding validated anecdotal evidence among fundraising consultants on the efficacy of a matching mechanism (Karlan & A. List, 2007). However, while the match treatments relative to a comparison group increase the probability of donating, contrary to conventional wisdom, larger match ratios (2:1 and 3:1) relative to smaller match ratios (1:1) did not have any additional impact. This result directly refutes the rationale for using larger match ratios and stands in sharp contrast to current fundraising practices.

 

For more details, visit: https://www.povertyactionlab.org/evaluation/effect-matching-ratios-charitable-giving-united-states

 

References:

 

Colombo, J. (2001). The Marketing of Philanthropy and the Charitable Contributions Deduction: Integrating Theories for the Deduction and Tax Exemption. Wake Forest Law Review, 36(3), 657-704.

Effect of Matching Ratios on Charitable Giving in the United States | The Abdul Latif Jameel Poverty Action Lab. (2017). Povertyactionlab.org. 

Karla, D., & List, J. (2007). Does Price Matter in Charitable Giving? Evidence from a Large-Scale Natural Field Experiment. The American Economic Review, 97(5).

Karlan, D., & A. List, J. (2012). How Can Bill and Melinda Gates Increase Other People's Donations to Fund Public Goods?.

Salamon, L., Sokolowski, S., & List, R. (2003). Global Civil Society: An Overview. Baltimore, MD: The Johns Hopkins Comparative Nonprofit Sector Project.

Sullivane, A. (2002). Affair of the Hearth. Barron's, 82(49).