An Experimental Test of Pure and Impure Altruism

Why Do People Give? An Experimental Test of Pure and Impure Altruism

Lise Vesterlund ∗ Mark Ottoni-Wilhelm † Huan Xie ‡

∗University of Pittsburgh

†IUPUI and IU Lilly Family School of Philanthropy

‡Concordia University

Workshop in Multidisciplinary Philanthropic Studies March 13, 2014 Overview

• Standard economic model of charitable giving is impure altruism. • Dual-motive theory: altruism and egoism/warm glow • Cornes & Sandler (1984), Steinberg (1987), Andreoni (1989) • Batson, Darley, & Coke (1978): “Motivation for helping may be a mixture of altruistic and egoistic desires.” • Lots of work over the past 25 years has been built on this model. • Andreoni (2006), Vesterlund (2010) • Twenty-ﬁve Years of Impure Altruism, UCSD Overview

• However, there has not been a test of a prediction of the impure altruism model that was not purposefully built into the model to begin with. • Nor a test that, for all practical purposes, the model could fail. • In this paper we conduct a charitable giving experiment that tests a prediction not purposefully built into the model. • Results consistent with impure altruism – the model passes the test, but ... • ... egoism/warm glow motives among the participants were weak. • Most of the giving in the experiment was due to altruism. Overview

• Innovations • New test that is closely integrated with theory. • New experimental design that carefully creates the theoretical framework inside the lab. • Measure individual heterogeneity in altruism and egoism/warm glow. • Signiﬁcance • Fundamental question about human behavior – existence of altruism • The strong altruistic motivation we see in the experiment diﬀers from previous experimental results that have suggested egoism/warm glow to be the predominant motive people give. Theory - a giving situation

• You are each paired with a different child (between 1 and 12 years old). • The child’s family home has been destroyed by fire. • You will be given money which you can allocate between the child and yourself. • The money you allocate to the child will be given to the Red Cross. • The Red Cross will use the money to buy books for the child, and will give the books to the child immediately after a fire. Theory - a giving situation

• The Red Cross provides the family with temporary shelter, clothing, a meal, a ”comfort bag.” • The Red Cross has no funds for any comfort items for the children. • In addition to the amount of your money you allocate for the child’s books, a foundation has agreed to donate a fixed amount of money towards the child. • The foundation’s fixed donation is independent of your allocation. • Hence, the total amount the Red Cross will be able to spend on books for the the child is the foundation’s fixed donation plus the allocation you make to the child. Theory - a giving situation

• Why use the funds to buy books? • The books provide a great bridge for Red Cross volunteers to connect with kids and get them talking about what they’ve experienced. Theory - a giving situation

• What will you decide to do? • The foundation will donate $4 towards the child. • You have $46 to allocate between the child and you. • How much will you allocate to the child? • Deciding . . . Experiment

Figure 1. Foundation = $4, Your income = $46. .4 .3 .2 Fraction .1 0 0 10 20 30 40 46 Dollars allocated to the child Source: Vesterlund, Ottoni-Wilhelm, Xie (2014). Reﬂection

Think for a moment: Why did you pick the amount you allocated to the child?

What motivated you? Theory - Why did you pick the amount you allocated to the child?

• Egoism/warm glow motivations – intensive focus on . . .

• + . . . seek positive self-evaluation of identity (moral principles) • – . . . avoid self-punishment for not helping (guilt) • + . . . seek approbation (extrinsic) • – . . . avoid shame (extrinsic) • 3 more intrinsic: • personal distress - alleviate the distress you feel hearing about the child and the ﬁre. • seek “empathic joy” • seek relief of negative mood state. Theory - Why did you pick the amount you allocated to the child?

• Altruistic motivations – intensive focus on the amount of books needed to accomplish the goal. • What amount of books are needed to allow the volunteers to ... • ... connect with the child and get her/him talking about what they’ve experienced? • ... initiate a process through which the child will begin to recover a sense of well-being? Theory - a DIFFERENT giving situation

• What will you decide to do? • The foundation will donate $10 towards the child. • You have $40 to allocate between the child and you. • How much will you allocate to the child? • Deciding . . . Experiment: situations 1 and 2

Figure 3. Two decisions. .4 .3 .2 Fraction .1 0 0 10 20 30 40 46 Dollars allocated to a child

Fdtn = $10, You = $40 Fdtn = $4, You = $46

Source: Vesterlund, Ottoni-Wilhelm, Xie (2014). Reﬂection again

Did you change the amount you allocated to the child?

Why? Theory - Pure Altruism

• If your goal was to get $15 to the Red Cross because that is enough books to help the volunteers connect with the child, then the two budgets you were just faced with—($4, $46) and ($10, $40)—are equivalent. • Faced with ( $4, $46), you give $11 (books = $4 + your $11). • Faced with ($10, $40), you give $5 (books = $10 + your $5). • The total amount of money in play was the same ($50)...“balanced-budget.” • When the foundation went from $4 → $10 (+ $6), you went from $11 → $5 (− $6). • −$6 Crowd-out (balanced-budget) = +$6 = −1 Theory - Pure Altruism - Income eﬀect

• What if we held the foundation’s donation fixed at $4 and increase your income from $40 to $46? • Faced with ( $4, $40), say you give $9 (books = $4 + your $9 = $13). • Faced with ( $4, $46), you give $11 as before (books = $4 + your $11 = $15). • $15−$13 +$2 Income effect = $46−$40 = +$6 = +.33 (from perspective of books) • $11−$9 +$2 Income effect = $46−$40 = +$6 = +.33 (from perspective of your contribution) Theory - Pure Altruism - Unfunded crowd-out

• What if when the foundation’s donation went up from $4 → $10 we held your income fixed at $40? (the foundation’s increase is not funded from your income...“unfunded”) • Faced with ( $4, $40), you give $9 as before (books = $4 + your $9= $13). • Faced with ($10, $40), you give $5 as before (books = $10 + your $5 = $15). • The total amount of money in play has gone up from $44 → $50. • When the foundation went from $4 → $10 (+ $6), you went from $9 → $5 (− $4). • $15−$13 +$2 Income effect = $50−$44 = +$6 = +.33 (from perspective of books) • $5−$9 −$4 Crowd-out (unfunded) = $10−$4 = +$6 = −.67 (from perspective of your contribution) • Crowd-out (unfunded) = −1 + Income effect = −1 + .33 Theory - Pure Altruism - In-kind transfers

• Standard intermediate microeconomics course – food stamps example. • Balanced-budget • Person gets $4 per week in food stamps and has $46 in cash income, say they spend %15 week on food ($4 food stamps + $11 cash) and $35 on other goods (cash). • If $10 per week in food stamps and has $40 in cash income, would still spend %15 week on food ($10 food stamps + $5 cash) and $35 on other goods (cash). • Unfunded • Person gets $4 per week in food stamps and has $40 in cash income, they spend $13 on food ($4 food stamps + $9) and $31 on other goods. • If $10 per week in food stamps and $40 in cash income, would spend %15 week on food ($10 food stamps + $5 cash) and $35 on other goods (cash). • Some of the $6 increase in food stamps was spent on food (.33 – the income eﬀect on food) and the rest was spend on other goods (.67 – the income eﬀect on other goods). Theory - Pure Altruism

• Increasing cash income and increasing amount of in-kind (food stamps, books–charity) is the same.

• Income eﬀect on books–charity is called q1 • In the previous example q1 = .33 Theory - EGOISM/Warm Glow - Unfunded crowd-out

• If you said “You know what, what happened to that kid is terrible, and it’s my duty to help out. I’ll give $20 out of my $40) income.” • Faced with ( $4, $40), you give $20 as before (books = $4 + your $20= $24). • Faced with ($10, $40)—“still my duty to give $20”—(books = $10 + $20= $30). • The total amount of money in play has gone up from $44 → $50. • When the foundation went from $4 → $10 (+ $6), you remained at $20. • $30−$24 +$6 Income effect = $50−$44 = +$6 = +1.00 (from perspective of books) • $20−$20 $0 Crowd-out (unfunded) = $10−$4 = +$6 = 0.00 (from perspective of your contribution) • Crowd-out (unfunded) = −1 + (Income effect = +1) = 0.00 Theory - Egoism/Warm Glow - Income effects (plural)

• You mean to tell me that if that person’s own income went from $40 → $46 they would give ALL of it to buy more books? • Not likely. Say they would give an additional $3.60 • $3.60 Her/his q1 = $6 = .60 • Then when the foundation increases its donation of books from $4 → $10, it is as if the person has a second, “extra” income eﬀect = .40 so that she/he spends all the $6 additional income on books, and none of it on other goods.

• This second “extra” income eﬀect is called q2.

• q2 is evoked only by the foundation’s $6 increase in donation.

• Pure Egoism/Warm glow ⇔ q1 + q2 = 1, and of course q2 > 0. Theory - Impure Altruism

• In between the two extremes of Pure Altruism and Pure Warm Glow. • Income eﬀects

• Pure altruism : q2 = 0 • Impure altruism: q1 + q2 < 1, and q2 > 0 • Pure Warm Glow : q1 + q2 = 1, and q2 > 0 • Crowd-out (balanced-budget / unfunded)

• Pure altruism : 0 , and −1 + q1 • Impure altruism: −1 + q2, and −1 + q1 + q2 • Pure Warm Glow : −1 + q2, and 0 Background

• Pure altruism came ﬁrst, in economic work • Edgeworth (1881), Boulding (1962), Hochman & Rodgers (1969), Becker (1974). • No one even thinking about Pure Warm Glow • “Utility theory will mislead us if we conclude from it that the motivation for philanthropy is no diﬀerent from that for other forms of expenditure” (Boulding 1962). • Pure altruism theory crashes into real world evidence • Econometric studies of unfunded crowd-out (κ) between -.05 and -.35 (Steinberg 1991, Andreoni 2006, Vesterlund 2010). • Even if κ = -.35, q1 would have to be +.65 !!! Background

• Impure altruism = altruism + warm glow • Cornes & Sandler (1984), Steinberg (1987), Andreoni (1989) • “Motivation for helping may be a mixture of altruistic and egoistic desires; it need not be solely or even primarily altruistic to have an altruistic component” (Batson, Darley, & Coke 1978). • Although there likely are other sources of utility from giving: seek approbation, avoid shame, positive self-evaluation (duty), etc... • ...“fairly obvious that neutrality will be unlikely to hold with warm-glow giving” and will produce a model “consistent with empirical observations” (Andreoni 1989). • In economics, warm glow was added to the Pure Altruism model to ﬁx the crowd-out prediction so that it aligned with the econometric evidence. Experiments

• Previous work has tested a Pure Altruism null hypothesis Bal • Bolton & Katok (1998) DG-student: |κ | = .74 (q2 = .26)– moderate warm glow • Eckel, Grossman, & Johnston (2005): DG-charity: |κBal | = 0 (q2 = 0) – Pure Warm Glow • Voluntary contribution mechanism experiments Bal • |κ | from .975 (q2 ≈ 0) to .672 (q2 = .328) • Andreoni (1993), Chan, Godby, Mestelman, & Muller (2002), Gronberg, Luccasen, Turocy, & Van Huyck (2012), Sutter & Weck-Hannemann (2004) – it depends • Much recent work has emphasized the practical importance of warm glow • e.g., Eckel, Grossman, & Johnston (2005), Crumpler & Grossman (2008), DellaVigna, List, & Malmendier (2009), Tonin & Vlassopoulos (2010, 2013) Predictions

• A balanced-budget crowd-out test can serve as a test of pure Bal altruism — H0 : κA = −1 ⇔ q2 = 0. • A balanced-budget crowd-out test cannot serve as a test of Bal impure altruism — H0 : |κIm | < 1 ⇔ q2 > 0 • Pure warm glow is also consistent with q2 > 0. • Practically, even if the true model is pure altruism, any confidence interval aroundκ Îm ≈ −1 will be consistent with some q2 > 0, however small. • More fundamentally, the second income effect q2 > 0 was Bal intentionally built in to yield |κIm | < 1 in the first place. • An unfunded crowd-out test can serve as a test of pure warm glow — H0 : κGlow = 0 ⇔ q1 + q2 = 1. Limits to impure altruism

• As Giving by others (e.g., the foundation) → ∞ ⇒ q1 + q2 → 1 ⇔ κ → 0. • Under fairly weak conditions on preferences. • Ribar & Wilhelm (2002). • New test: • Increase Giving by others (e.g., the foundation) from a low level to a high level and test H0 : |κG Low | ≥ |κ High |. −i G−i • This prediction was not intentionally built into the impure altruism model. Limits to impure altruism: Cobb-Douglas illustration

Figure 4A. Cobb-Douglas q1 + q2 as giving by others (G-i) increases. 1

q1 + q2 .8 | k .6 , |

2 a = .40 q b = .10 + 1 .4 q .2 |k| 0 0 20 40 60 80 100 Giving by others (G-i)

q1 + q2 Crowd-out

Notes: The Cobb-Douglas parameters are a = .40 and b = .10. U = a log(G) + b log(gi) + (1 - a - b) log(xi). Income is held constant at wi = $40. New test

• Increase giving by others from a low level to a high level and test H0 : |κG Low | ≥ |κ High |. −i G−i • Intuition • When giving by others is Low, motivated by need to provide the charitable good (books): q1 > 0 and q2 ≈ 0. • As giving by others ↑, need for more books ↓ but warm glow motivation ↑: q2 ↑ • Eventually, when giving by others ↑ to a high enough level, q2 ↑ enough so that q1 + q2 ≈ 1 ⇔ κ ≈ 0. • Any giving still being done is motivated by warm glow (at the margin). • This prediction was not intentionally built into the impure altruism model. New test - Experimental design

• Must hold need being addressed by the charity ﬁxed as giving by others ↑. • Careful control over giving by others, including giving by others outside the experiment intended to address the same need. • “Individualized charity” design. Predictions - Five tests

Table: 1b. Five tests

Test Model being tested H0

1 Pure Altruism |κBal | ≥ 1

2 Pure Warm glow κ ≥ 0

3 Impure altruism - decreasing crowd-out |κG Low | ≥ |κ High | −i G−i

Low High 4 Impure altruism - increasing q2 q2 ≤ q2

High High 5 Impure altruism - at G−i q2 > 0 and

High High q1 + q2 < 1 Individualized charity

• Created a new public good through collaboration with the American Red Cross in Southwestern Pennsylvania. • In the event of a fire in SW PA, the Red Cross helps the affected families find temporary shelter, provides them with clothing, a meal, and gives them essential toiletries. • Prior to study no items given to the children affected by the fire. • Each participant in the experiment is paired with a different child whose family home has suffered extensive fire damage, and ... • ... can give some money to the Red Cross to use to buy books for the child. • The books provide a bridge for Red Cross volunteers to connect with the child. • Neither the Red Cross, nor other donors, provide ”bridge-books” for this child. Instructions 1

• You will be asked to make six decisions. • One of your six decisions will be randomly selected for payment. • Your payment will result from your decision, plus $5 for showing up to the study. • A research foundation provided the funds. Instructions 2

• You are paired with a child (between 1 and 12 years old). • The child’s family home has been destroyed by ﬁre. • In each of your six decisions you will be given money which you can allocate between the child and yourself. • The money you allocate to the child will be given to the Red Cross. • The Red Cross will use the money to buy books for the child, and will give the books to the child immediately after a ﬁre. Instructions 3

• The Red Cross provides the family with temporary shelter, clothing, a meal, a ”comfort bag.” • Unfortunately, the Red Cross has no funds for any comfort items for the children. • We have joined the Red Cross to collect funds to buy books for the aﬀected children. • In each of your six decisions you will be given money which you can allocate between the child you are paired with and yourself. Instructions 4

• In addition the foundation has agreed to donate a fixed amount of money towards the child, independent of your allocation. • The total amount to be spent on the child is the sum of the foundation’s fixed donation and the allocation you make to the child. • The amount of money that you can allocate between the child and you, as well as the foundation’s fixed donation to the child, will vary across the six decisions. Instructions 5

• If you choose not to allocate any funds to the child, then the money to be spent on the child will be limited to the research foundation’s ﬁxed donation. • Only you have the opportunity to allocate additional funds to the child. • Neither the Red Cross nor any other donors provide books to the child. Instructions 6 — Why use the funds to buy books?

Children’s needs are often overlooked in the immediate aftermath of a disaster because everyone is concerned primarily with putting the ﬁre out, reaching safety, and ﬁnding shelter, food and clothing...just the basics of life. So many times, I’ve seen children just sitting on the curb with no one to talk to about what’s happening... for this reason I’ve found trauma recovery experts in the community to work with us to train our volunteer responders in how to address children’s needs at the scene of a disaster...... being able to give the children fun and distracting books will provide a great bridge for our volunteers to connect with kids and get them talking about what they’ve experienced. Decisions 1-6 as seen by a participant Test 1: Pure altruism

Bal H0 : κA = −1 ⇔ q2 = 0

Table 2. Balanced-budget crowd out: At low and high giving by others 1.2 p = .255 1 p = .002 .8 .6 .4 Crowd-out (Balanced-budget) .2 0 Low $4-10 High $28-34 Notes: Vesterlund, Ottoni-Wilhelm, & Xie (2014) Table 2, columns 1 and 2. Tests are for complete crowd-out. Estimates not adjusted for corner decisions.

Low Result: Pure altruism not rejected at G−i , but is rejected at High G−i . Test 2: Pure warm glow

H0 : κ ≥ 0

Table 4a. Change in unfunded crowd out: From a low to a high level of giving by others 1 .8 .6

p < .001 .4

Crowd-out (Unfunded) p < .001 .2 0 Low $4-10 High $28-34 Change Notes: Vesterlund, Ottoni-Wilhelm, & Xie (2014) Table 4, columns 1--3. Tests are for zero crowd-out (bars 1 and 2), and for zero change in crowd-out (bar 3). Estimates not adjusted for corner decisions.

Result: Pure warm glow is rejected. Test 3: Impure altruism

H0 : |κG Low | ≥ |κ High | −i G−i

Table 4b. Change in unfunded crowd out: From a low to a high level of giving by others 1 .8 .6

p < .001 .4

Crowd-out (Unfunded) p < .001 .2

p = .013 0 Low $4-10 High $28-34 Change Notes: Vesterlund, Ottoni-Wilhelm, & Xie (2014) Table 4, columns 1--3. Tests are for zero crowd-out (bars 1 and 2), and for zero change in crowd-out (bar 3). Estimates not adjusted for corner decisions.

Result: H0 : Crowd-out stayed the same (or got bigger) is rejected ⇒ Results consistent with Impure Altruism. Test 4: Impure altruism - intuition

Low High H0 : q2 ≤ q2

Table 5. Additional evidence supporting the impure altruism model. Account for corner decisions

Change in Change in Unfunded crowd-out unfunded balanced-budget and own income effect crowd-out crowd-out (restricted sample)a (full sample)

Giving by others Low/ Low/ High High High (1) (2) (3) d Giving by others (G-i) -0.53 -0.99 -0.41 (0.07) (0.09) (0.07)

Giving by others interacted 0.12 b 0.18 c ‒ with a dummy indicator that (0.08) (0.12) giving by others is high

d Income (wi) ‒ ‒ 0.40 (0.07)

Budgets 1, 2, 2, 5, 3, 4, 3, 4 4, 6 6 n 70 85 85

Result: Intuition not rejected. Test 5: Impure altruism - at a high level of giving by others

H0 : q2 > 0 and q1 + q2 < 1

Table 5. Additional evidence supporting the impure altruism model. Account for corner decisions

Change in Change in Unfunded crowd-out unfunded balanced-budget and own income effect crowd-out crowd-out (restricted sample)a (full sample)

Giving by others Low/ Low/ High High High (1) (2) (3) d Giving by others (G-i) -0.53 -0.99 -0.41 (0.07) (0.09) (0.07)

Giving by others interacted 0.12 b 0.18 c ‒ with a dummy indicator that (0.08) (0.12) giving by others is high

d Income (wi) ‒ ‒ 0.40 (0.07)

Budgets 1, 2, 2, 5, 3, 4, 3, 4 4, 6 6 n 70 85 85

Result: Impure altruism not rejected. Structural model

Ui = αlog(G) + βlog(gi ) + (1 − α − β)log(xi )

Table: Cobb-Douglas

All Except always at a corner (N = 85) (N = 78) Altruism (α) .594 .569 (.025) (.025)

Warm glow (β) .021 .026 (.009) (.009)

ρ .902 .829 (within-person corr.) (.016) (.025) Notes: Non-linear random eﬀects Tobit. Crowd-out in the representative model

Figure 9. Cobb-Douglas q1 + q2 as giving by others (G-i) increases. 1

q1 + q2 .8 | k .6 , |

2 a = .594 q b = .021 + .4 1 q

.2 |k| 0 0 20 40 60 80 100 Giving by others (G-i)

q1 + q2 Crowd-out

Notes: The Cobb-Douglas parameters are a = .594 and b = .021. U = a log(G) + b log(gi) + (1 - a - b) log(xi). Income is held constant at wi = $40. These are the a, it:b} estimates from the representative Cobb-Douglas unility function. (N = 85). Counterfactual: if there had been no altruism

• α = 0 and β = .021 • 95 % of the giving would be gone. Individual heterogeneity in altruism and warm glow

Ui = αi log(G) + βi log(gi ) + (1 − αi − βi )log(xi )

Figure 8: Cobb-Douglas Altruism and Warm Glow Parameters 1 .8 ) a .6 .4 Altruism ( .2 0 0 .2 .4 .6 .8 1 Warm glow (b) Notes: Points on the y-axis are pure altruism participants. Points on the x-axis are pure warm glow participants. n = 78. Individual heterogeneity in altruism and warm glow

Ui = αi log(G) + βi log(gi ) + (1 − αi − βi )log(xi )

Figure 8b: Altruism and Warm Glow: Women and Men 1 .8 ) a .6 .4 Altruism ( .2 0 0 .2 .4 .6 .8 1 Warm glow (b)

Women Men

Notes: Points on the y-axis are pure altruism participants. Points on the x-axis are pure warm glow participants. n = 78. Conclusion - Signiﬁcance

• First test of a prediction of the impure altruism model, not designed into the model from the beginning. • Strength of warm glow detected in an experiment is sensitive to the level of exogenous provision of the public good at which crowd-out is being measured, and ... • ... other characteristics of the context, such as the purpose of the non-profit organization to which participants can give. • In the experimental context we established, participant motives differ from previous experimental results that have suggested warm glow to be the predominant motive people give to charity. Conclusion - Significance

• Practical implications • How fundraising communication takes into consideration ”Why might potential donors give?” • How donors reﬂect on the question ”Why do I give?” • Evidence for the existence of altruism in charitable giving. Thank you

• Kong Wah Lai, Michael Menietti, and Linnea Warren who helped conduct the experiments. • Sandi Wraith and the American Red Cross of South Western Pennsylvania. • IU Lilly Family School of Philanthropy Research Fund Grant 54-921-10. What is q2 ?

• Mechanical answer: Impure altruism places no restrictions on the size of q2. • q2 is what it needs to be in order to generate a prediction that is consistent with the available crowd-out evidence:

• κˆIm = − .05, if q1 = .02, would be rationalized by q2 = .93 • a “cosmological constant” for charity

• Economics answer: q2 is a difference between two income effects: dG ∗ dG ∗ • − = [q1 + q2] − q1 dG−i dwi ∗ ∗ dxi dxi • − = [1 − q1] − [1 − (q1 + q2)] dwi dG−i • Psychological answer: q2 arises because there are 7 specific types of warm glow/egoism, none of which are satisfied when G−i ↑: • 2 extrinsic: avoid shame, seek approbation. • 5 intrinsic: avoid guilt, seek positive self-evaluation of identity, seek “empathic joy,” seek relief of negative mood state, reduce personal distress. What is q2 ?

• Pop culture answer . . . If this is q1 ...... then this is q2

. . . warm glow indeed!