High earners less generous

13 April, 2010

Australians like to pride themselves on giving money to those in need, but what motivates us to part with our hard-earned to help others?

The website of the Australian Government's overseas aid program is predictably empathetic towards the plight of those not living in 'The Lucky Country'.

"Australia gives aid because we want to help those less fortunate than ourselves," says AusAID. "Australians believe that giving aid is the right thing to do; it makes a real difference to other people's lives."

It's hard to argue: the Australian Red Cross estimates we contributed $117 million to the Indonesian tsunami appeal and more than $379 million in the 2009 Victorian Bushfire Appeal. (AusAID says the government will provide $3.8 billion worth of 'official development assistance' in 2010.)

But what drives such charitable giving? Is it really to 'make a difference', or are there other factors involved?

Dr Nikos Nikiforakis from the University of Melbourne Department of Economics, at the Faculty of Business & Economics studies the driving factors of giving.

"Most economists usually begin with the assumption that people are selfish, trying to maximise their own utility and wealth. But laboratory evidence shows that many people like to give.

"If people are giving when they expect no personal gains, it must be that giving makes them better off. So they may enjoy the act of giving, or helping someone else, the idea that if I see you're better off now, then I feel better."

Alongside colleagues Dr Nisvan Erkal and Professor Lata Gangadharan, Dr Nikiforakis has been conducting a series of laboratory experiments with groups of people to try to isolate the reasons for giving and also how that links to relative earnings. In the first stage, participants compete in a tournament that determines their earnings, while in the second stage they decide whether they wish to transfer part of their earnings to one or more of their group members.

"Field evidence suggests that, unlike one might have expected, high earners may be less likely to give to charity. The reason for this, however, is unclear. It may be that high earners give more sporadically to maximise the impact of their donations, but it may be because of other reasons."

The methodology is particularly important, and not just because 'economists' and 'labs' do not traditionally go hand in hand. The participants were given real monetary incentives in a controlled environment with guaranteed anonymity, ensuring that giving was not driven by strategic considerations.

"It allows us to isolate some of the possible reasons, such as donations where the giver receives some degree of glory or reward like the naming of a building after them.

"It's bare bones, do I give for the sake of giving or not?"

The initial results from the laboratory experiments replicate the evidence from the field. When participants earn their income, those ranked first – i.e. are richer – are significantly less likely to give than those ranked second or below.

"What we found is that, even though there are no strategic considerations, the people who work the hardest behave more selfishly. These people who earn the highest amounts are significantly – three times – less likely to give."

Social preferences and personality play a big role, according to Dr Nikiforakis. If you're a nice person you may be more likely to believe others are nice and as a result, perhaps not work as hard because of the feeling that others will give to you. On the other hand, those who are selfish may be more likely to think others are selfish.

"This difference between the highest earners and others with lower earnings disappears if individual earnings are randomly determined or if individuals learn about the opportunity to transfer after they earn their income," says Dr Nikiforakis.

Hence, considering the source of income is important. "Not all high earners are selfish. Let's distinguish sources of income into two categories: those that are windfall gains, such as an inheritance or lottery win, and those from other sources like work," says Dr Nikiforakis. "Our research suggests that if all the money we had was due to windfall gains, you would have fewer high earners being selfish."

The results at this point are not conclusive. "Perhaps if we are talking inheritance, some may be born to 'old money' and indoctrinated or taught to behave in a particular way. On the other hand, anecdotally we know people who win the lottery often give money away."

Undoubtedly the reasons behind giving remain a puzzle and yet giving still remains a common fact of life. "Like with all social phenomena, we just want to know what motivates it," says Dr Nikiforakis, "How different policies and circumstances may affect it."

Source: University of Melbourne