Strings-Attached or Unrestricted Donations: For Charities, It’s Smart to Offer Both
Transparency and psychological payoff factor into why donors choose earmarked or non-earmarked giving.
Earmarked donations—those in which the giver dictates how and where money should be spent—can be challenging for charities. If a project is overfunded or the purpose is no longer valid, the strings attached to a donation can render it less effective or useful for a nonprofit organization.
Therefore, charities generally prefer non-earmarked donations. However, many operate under the assumption that earmarking increases donations and that donors prefer it because they have control over their donations, it increases transparency and it boosts their feelings of “warm glow”—the personal satisfaction they experience from giving.
For those reasons, charities face a tough decision of whether to encourage or request earmarked donations from donors. A new study shows that organizations should embrace both earmarked and non-earmarked donations and give donors a choice.
“Giving both options is the best possible outcome in collecting money for charities,” said Gloria Urrea, an assistant professor of operations management at the Leeds School of Business and co-author of the study, which was accepted Aug. 2 in the journal Manufacturing & Service Operations Management and is the runner-up in the 2023 POMS College of Humanitarian Operations & Crisis Management Best Paper Award Competition.
“Our experiment found that if charities let donors choose and they give them two options—earmarking and non-earmarking—most of the people would prefer non-earmarked donations,” Urrea said. “This finding is important because it means that charities can raise their preferred non-earmarked donations while still respecting the preference for those donors who do want to earmark.”
Charities rely heavily on individual donations: In the U.S., they accounted for 67% of all charitable contributions in 2021, according to Giving USA.
The study, “To Earmark or to Non-Earmark? The Role of Control, Transparency and Warm-Glow,” co-authored by Sebastian Villa of the University of New Mexico’s Anderson School of Management and Özalp Özer of the Jindal School of Management at the University of Texas at Dallas, includes suggestions on how charities can design fundraising campaigns that increase earmarked and non-earmarked donations, building on transparency and donors’ feelings of altruism and warm glow.
The role of transparency
Transparency is important to donors because it provides more visibility into how their contributions are used. The researchers found that disclosing more information about efficiency and inefficiency—specifically related to how inefficiencies result when donations are restricted—as well as “destination transparency”—assurances and visibility that donors’ preferences are being prioritized—increases non-earmarked donations. In contrast, disclosing information about how much of donors’ contributions are used to cover overhead expenses increases earmarked donations.
“People like transparency—donors like it because at the end of the day, they like to know exactly where their money is going,” Urrea said.
The ‘warm glow’ factor
The researchers also confirmed the assumption that earmarking solely amplifies warm glow, which is the psychological payoff donors receive from the act of giving. In addition, they found that donors’ level of altruism, or giving for the sole purpose of improving the welfare of beneficiaries, does not change between earmarked and non-earmarked donation types.
Given these two drivers to donate, charities can use altruism and warm glow as tools to increase donations.
“If charities want to raise money for earmarking, they should leverage warm glow, and they can do that by incorporating incentives to increase donors’ sense of personal satisfaction,” Urrea said. “In theater, for example, you could publicly recognize donors and send thank-you cards.”
To increase non-earmarked donations, charities could benefit from the increase in donors’ sense of altruism by providing more details about the impact of donations of beneficiaries.
“A charity focused on distributing meals, for example, can tell donors how many meals they are distributing and make sure to emphasize the positive impact,” Urrea said.
Using these different strategies can help charities design more effective fundraising campaigns.
“We want to provide charities with a toolset for what’s working,” Urrea said. “When one type of donation is more relevant than the other, transparency and enhancing donors’ feelings of altruism and warm glow can be used as tools for nudging donors to a certain donation type, depending on the charities’ fundraising goals.”