There’s been much study by demographers about the relationship between income and giving to charity. Some demographers have shown a positive relationship between income and giving, some have shown a U-shaped relationship, so the poor and rich contribute more than the middle class, and others have shown no relationship.
I’ve been consumed by the paper of Erkal, Gangadharan, Nikiforakis on the economics of giving. I think the paper is forthcoming in the American Economic Review. They conduct an experiment that shows that it’s not necessarily peoples’ incomes that matter to charity giving but instead how they got this income.
Let’s compare two situations. First, we have a marathon and prizes for the runners that come first, second, third, and fourth. How charitable will each of the place holders be? Suppose instead that the same four prizes were given using a lottery. Will the winners be more or less charitable?
The Erkal, Gangadharan, Nikiforakis paper conducts such an experiment using University of Melbourne students as test subjects. Groups of four players engage in a three stage game. In the first stage they are given a cognitive test that requires a lot of effort. They are ranked and given a monetary prize based on their rank. In the second stage the computer can randomly decrease the winnings. In the third stage the ranking of their performance in the first stage and the outcome of the computer randomization in the second stage are revealed. They are then asked to consider giving away some of their prize money to the other members of the group.
So what do we observe in the experiment? If the randomization didn’t have an effect on the winnings, then the first ranked player is less likely to give than the second ranked player. This difference, however, disappears when the incomes that are earned are randomly determined.
Altruism not only depends on income but it also depends on how the income was earned. Do self made millionaires give less to charity than those who are born to wealth? In a competitive work environment, are those who come out on top less charitable to their colleagues?
There are a few papers in experimental economics that make me sit down and think about economics. This is certainly one of them.