Donors Give More When They Have a Sense of Belonging

Originally published in the New York Times on July 5, 2014.

With the rise of behavioral economics, my profession is no longer so fixated on the theory that people are relentlessly selfish, striving only to maximize their own pleasure. We know, for example, that work is not just eight daily hours of suffering that people endure to make money for their own benefit. People actually like to work if they see meaning in it, and they can be generous with their money, too.

I work at the nonprofit Yale University, and the higher purpose of education is a major reward for me. Many teachers and others in the helping professions share that feeling. They have consciously chosen to make less money than they could in the private sector, because they feel they are contributing to a greater good.

Philanthropic causes could do more to gain from this natural tendency. Yes, charities have already been very inventive in strategies to encourage donations, but they’ve been limited by institutional and legal structures that they take as a given. Fortunately, charities now have a chance to look at some new organizational paths to giving, some of which have benefited from research in behavioral economics.

In a recent paper, Catherine C. Eckel and Jonathan Meer, both of Texas A&M University, and David Herberich, now of BeyondCore, a provider of automated business analysis, described an experiment involving fundraising efforts for a university. Prospective donors were randomly divided into a control group and an experimental group. The only difference was that those in the experimental group had the option to donate money to a specific academic college, rather than the university as a whole.

The researchers found that while there was little difference in the probability that the individuals in the two groups would make a donation, the people in the experimental group gave much larger amounts. That was true even for those who ultimately decided to donate to the general fund. Just being given the choice of active involvement, and then not taking it, increased the donation.

This experiment shows how we might benefit from expansion of the so-called benefit corporation, introduced in Maryland in 2010 and now legal in about half the states. A benefit corporation is halfway between a for-profit and a nonprofit. It has two purposes: to provide profits to shareholders and to achieve an announced social or environmental goal. The law obligates the corporation to achieve both, and ensures it doesn’t exist only to make money.

Nearly 1,000 benefit corporations are now in operation, according to the Benefit Corporation Information Center, managed by the nonprofit B Lab, which has advocated this new corporate form.

For example, the King Arthur Flour Company of Vermont, which has operated since 1790 (mostly under a different name) became a benefit corporation three years ago. Its 2013 Benefit Corporation Report details activities that include encouraging sustainable grain production, sponsoring local education programs, contributing to anti-hunger programs and offering paid time off to employee volunteers.

The benefit-corporation concept is an experiment, and it’s too soon to know how it will fare. My guess is that it will be a big success, because it can inspire loyalty, cooperation and real purpose, which helps create profits, too. But that doesn’t mean we shouldn’t experiment with other corporate forms to encourage giving.

In my 2012 book, Finance and the Good Society (Princeton University Press), I proposed another organizational form that would better encourage philanthropy—this time a form that is strictly nonprofit. As such, it has an advantage over a benefit corporation in that the public will be more likely to donate to it, seeing it as devoted

I called this new form a “participation nonprofit,” meant for causes that need substantial contributions. Such an organization, which might run a school or a hospital, would offer to sell shares instead of requesting donations. The share sales would really be donations, but would be framed differently and come with rights that would change the whole giving experience.

Shareholders could vote their shares at stockholder meetings, as they would in a traditional corporation. The organization would pay some kind of dividend, too, though this would go into a restricted account, to be used only for a charitable purpose of the owner’s choosing. And shareholders could bequeath the stock to heirs, and could even sell it, though the proceeds would also go into the restricted account. For this plan to work well, people would need to receive a tax deduction for their share purchases, which are really irrevocable contributions to charity.

Structured this way, charitable giving would become personally meaningful in the way that investing is. Givers would feel a real sense of participation and partial control over their activities.

Charities might also experiment with various other organizational forms to foster philanthropic or community impulses. Perhaps they could involve cooperatives, mutual societies or other groups that also impart a sense of ownership. To date, however, large-scale experiments with such forms have been limited—whether by tax or other legal barriers, or simply by old-fashioned mistrust of change.

Clearly, it’s time to try these new paths to giving. Some of them will surely provide a better way to further our deeper purposes.