A Nudge for Giving

This is a guest contribution from David Ong. David is a fifth year undergraduate arts/medicine student at UNSW currently doing research on the ethics of health-related humanitarian aid in the developing world.

Bill and Melinda Gates and Warren Buffet have recently announced that they are going to ask their fellow American billionaires to pledge at least half their net worth to charity. This has already achieved results: four billionaires have made the pledge. To the extent that this initiative helps shift a culture of conspicuous consumption towards a culture of conspicuous giving, it can only be a good thing.

Could we extend the idea and consider an opt-out registry of each individual’s charitable donations, for which they claim tax deductions?

We know that people (and companies) look at their peers when they make decisions about how much money they should give to charitable causes. Companies that give donations are keen to share this fact. Their motivation is clear – they want to project the impression that they are socially responsible. But equally important is that less generous corporations are punished whenever customers choose to give their custom to more philanthropic firms.

The same does not apply to individuals. They do not always want to talk about their generosity, lest they be seen as showy or conceited. This makes it hard to know how much your peers are giving. Furthermore, as Peter Singer remarks in his famous essay Famine, Affluence, and Morality, giving money away is ‘regarded as an act of charity in our society’. Because of this, ‘it is not thought that there is anything wrong with not giving’.

However, donators tend to oblige when others want to acknowledge their generosity and use it to encourage others to contribute. Many concert programmes, for example, list the names of patrons who have donated over a certain threshold. People can give anonymously, but few do. Because the recognition is opt-out, nobody could accuse benefactors of being showy or conceited.

Unfortunately, this does not work for less visible causes. Nor does it tell of a particular person’s total generosity over a variety of causes.

To summarise: Society would benefit from having information about donations shared (it would increase generosity). The generous want the information shared, but can’t do it themselves. The answer is a registry.

Is there any harm to conspicuous giving? Perhaps those who don’t choose to give might feel shame, when information on how much each person gives is readily available.  But there’s a similar harm to conspicuous consumption – the shame of not being able to match your neighbour when he buys his yacht.

Communication as a means of preventing financial crises

Student Contributor: Tom Gole (Tom is an Australian PhD student in the Harvard Economics Department. He is a Frank Knox Fellow, and holds degrees in Law and Economics from the University of Queensland.)

In a recent paper, Gennaioli, Shleifer and Vishny proposed a model of the role of innovation in causing financial crises.  Their basic story is that investors seek a particular type of cashflow, usually riskless, and financial intermediaries create new types of assets that meet those demands.  The problem arises when investors neglect the possibility of extreme, but unlikely, negative events: in that case, intermediaries issue too many of the new securities, and when investors receive news that reminds them of the unlikely events, the market crashes as they flee to the genuinely secure assets. Continue reading “Communication as a means of preventing financial crises”