The Effect of Seed Money and Matching Gifts in Fundraising: A Lab Experiment
Last registered on May 16, 2019

Pre-Trial

Trial Information
General Information
Title
The Effect of Seed Money and Matching Gifts in Fundraising: A Lab Experiment
RCT ID
AEARCTR-0004101
Initial registration date
April 11, 2019
Last updated
May 16, 2019 5:54 PM EDT
Location(s)

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Primary Investigator
Affiliation
Texas A&M University
Other Primary Investigator(s)
PI Affiliation
Texas A&M University
PI Affiliation
Texas A&M University
Additional Trial Information
Status
On going
Start date
2019-04-11
End date
2020-05-13
Secondary IDs
Abstract
The nonprofit sector is known for significant presence of highly inefficient organizations. Apart from the well-publicized fraudulent nonprofits, such as the Cancer Fund of America, there are many organizations that may not blatantly scam donors, but are nevertheless doing a poor job of providing public benefits. Donors' lack of information is likely a contributing factor. While the presence of rating agencies can help donors, the staggering number of charitable organizations makes the available information imperfect and costly to obtain. Consequently, a big challenge for well-run nonprofits is finding ways to credibly inform donors of their quality and distinguish themselves from their poorly performing counterparts.

We aim to investigate experimentally the role that leadership giving plays in conveying information to donors. Leadership gifts can be in the form of an unconditional lump sum called “seed money” or a promise of matching small donations by a fixed ratio called “matching gift”. Our goal is to understand how the type and size of the leadership gift impact donors' beliefs about the quality of the public good and their willingness to donate.

This is based on our novel theoretical model of fundraising, which reveals that the fundraiser's choice of leadership scheme depends crucially on the lead donor's information. If the lead donor is fully informed about the quality, either exogenously or endogenously via costly information acquisition, the charity relies on the lead donor to reveal the quality to subsequent donors through the size of her donation. This eliminates the signaling concern of the high quality charity when choosing her optimal fundraising scheme. Consequently, consistent with the existing theoretical literature, we find that in absence of signaling considerations, the fundraisers should optimally choose the matching scheme, as it alleviates the free rider problem present in public goods provision. However, if the leader is not fully informed about the quality, the lead donor's gift becomes a less reliable source of information and the fundraiser may have to employ the fundraising scheme itself to inform donors. In this case, the model gives rise to a strong prediction regarding the use of the two schemes to signal quality information to donors. While, as any signaling game, multiplicity of equilibria may arise, we find that in any equilibrium with partial information acquisition by the lead donor, the use of seed money in equilibrium is associated with higher expected quality compared to matching gift. Intuitively, since seed money is less effective in alleviating the free-rider problem compared to matching, it becomes a costly signaling tool for the high quality fundraiser that aims to differentiate itself from the low quality fundraiser. As a result, in equilibrium the high quality fundraiser solicits for seed money more often and for matching gift less often than the low quality fundraiser. This, in turn, gives rise to an equilibrium belief among donors that seed money is indicative of higher quality.

We investigate the theoretical predictions regarding the use of seed money as a signal of high quality in controlled lab experiments. The lab is an ideal environment for this as it allows us to control the amount of information available to donors, which is hard to achieve in the field. Moreover, we are the first to endogenize the choice of leadership scheme in the lab to understand the information that each scheme carries, how donors form beliefs, and how they respond to different schemes. In particular, our experimental design consists of a piece-wise linear public good game, in which the marginal per-capita return (MPCR) varies with the total amount raised and the quality of the public good. This ensures sufficient variation in the equilibrium contribution amounts to make both channels of signaling, namely the scheme choice and the lead donor's gift, possible. Since the ability of matching to alleviate the free-rider problem, and thus raise more contributions relative to seed money, is a key driving factor for seed money to emerge as a costly signal of quality in the incomplete information setting, our investigation consists of two consecutive experiments- one focusing on a complete information environment, and another-on an incomplete information environment. The current experiment that will be described in the “Experimental Details” section, compares the two schemes and studies the endogenous choice of scheme when the quality is known to all players. It also provides a control for the second experiment. The second experiment, will extend the framework to incomplete information and varies the probability of verification by the lead donor in order to establish how the choice of scheme and the lead donor's contribution choice interact to convey information to the downstream donor. This will allow us to measure the signaling value of each scheme.
External Link(s)
Registration Citation
Citation
Krasteva, Silvana, Marco Palma and Piruz Saboury. 2019. "The Effect of Seed Money and Matching Gifts in Fundraising: A Lab Experiment." AEA RCT Registry. May 16. https://www.socialscienceregistry.org/trials/4101/history/46623
Experimental Details
Interventions
Intervention(s)
Intervention Start Date
2019-04-11
Intervention End Date
2020-05-13
Primary Outcomes
Primary Outcomes (end points)
(1) Scheme choice (lump sum or matching) by Player 1
(2) Contributions decisions by Player 2 and Player 3
Primary Outcomes (explanation)
Please refer to the experiment design
Secondary Outcomes
Secondary Outcomes (end points)
(1) Beliefs by PLAYER 1 and PLAYER 2 regarding the decisions made by downstream players
(2) Eye tracking and facial expression data during the experiment
(3) 4 page survey about demographics, math skills, family background, and charity activity
Secondary Outcomes (explanation)
Please refer to the experiment design
Experimental Design
Experimental Design
In this experiment, we recruit subjects to participate in a lab experiment conducted in Human Behavior Lab at Texas A&M University. We implement a 3x1 between subjects design, in which subjects are randomly assigned to one of three possible treatments: Exogenous Seed, Exogenous Match, Endogenous Scheme. The first two treatments serve as control and correspond to the cases, in which the scheme is exogenously set by the experimenter to lump sum (seed money) or matching, respectively. The goal is to compare the amount of money raised by each scheme and determine whether matching is indeed the more effective scheme. The Endogenous Scheme is the main treatment of interest and corresponds to the case, in which the fundraiser (one of the subjects randomly assigned to this role) is given the choice between lump sum and matching in order to establish the fundraisers' preference between the two fundraising schemes. In particular, using this experimental design we test the following two hypotheses:

1. The average contributions in the Exogenous Seed treatment are lower than the average contributions in the Exogenous Match treatment.
2. The probability of choosing matching by the fundraiser in the Endogenous Scheme treatment is higher than 0.5.
Experimental Design Details
Not available
Randomization Method
Subjects will be assigned to treatments based on session signup (they have no prior knowledge of the treatment that is pre-assigned to each session).
Role in the game and group matching is done in the lab randomly by computer program coded in z-Tree.
Randomization Unit
Individual
Was the treatment clustered?
No
Experiment Characteristics
Sample size: planned number of clusters
There is no clustering.
Sample size: planned number of observations
(1) Average contributions in the Exogenous Match treatment: 280 rounds of game played by 84 subjects randomly re-matched into groups of 3 for each round (2) Average contributions in the Exogenous seed treatment: 280 rounds of game played by 84 subjects randomly re-matched into groups of 3 for each round (3) Scheme (lump sum or matching) chosen by Player 1 in the Endogenous Scheme treatment: 440 rounds of game played by 132 subjects randomly re-matched into groups of 3 for each round
Sample size (or number of clusters) by treatment arms
300 subjects recruited from Texas A&M University student population
This number may vary based on available funding.
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB
INSTITUTIONAL REVIEW BOARDS (IRBs)
IRB Name
Texas A&M University
IRB Approval Date
2019-04-02
IRB Approval Number
IRB2018-1438M