Charitable Giving: Why Fewer Is More

(Photo: Howard Lake)

December is the holiday giving season for many, but there are a lot of charities competing for your dollars, and it can be hard to know where they will do the most good.

I’ve written before about why you should be wary of sites that rank charities by administrative expenses. It tells you nothing about if the actual effectiveness of a charity’s activities. The recent Freakonomics Radio episode “Free-conomics” also pointed out that many charities themselves don’t even know if what they’re doing actually works.  This was one of the reasons I founded a non-profit which carries out research around the world to find out exactly which efforts to fight poverty work best. 

As well as choosing which charities to support, we also make choices about how we support them. Often overlooked, this choice can be just as important in influencing what our money actually achieves. Below, two experts in philanthropy, Caroline Fiennes and Phil Buchanan, explain one crucial effect of how we give. Fiennes is the founder of Giving Evidence and the author of It Ain’t What You Give, It’s the Way That You Give It: Making Charitable Donations That Get ResultsPhil Buchanan is president of the Center for Effective Philanthropy

Charitable Giving: Why Fewer Is More
By Caroline Fiennes and Phil Buchanan

As any 10-year-old can tell you, multiplication is commutative: 2 x $70 is the same as 70 x $2.

But not in charitable giving, it turns out. Making two donations of $70 is a good deal more valuable to charity than making 70 donations of $2.

The reason lies in the fixed transaction costs. Many charities (unavoidably) get charged a fee for each deposit into their bank account. So two large donations create only two dollops of that fee, whereas 70 smaller donations attract 70 dollops. That fee might be $0.25 per transaction. So if the $140 is given in two donations, less than 1 percent of the two donations gets lost in transit between the donor and the charity; if the $140 is given in 70 donations, 12.5 percent gets lost in transit; and if $140 were given in 140 donations of $1, fully 25 percent would fail to reach the charity. Of course, if you gave 1400 donations of only $0.25 each, nothing would reach the charity at all.

The pattern persists even if you’re giving a lot. To get money from philanthropic foundations, charities typically have to apply and then later report on what they then do with the money. This work creates another type of transaction cost. Research by the U.S. Center for Effective Philanthropy shows that these transaction costs are much higher if the foundation makes several small grants than if it makes a few large ones of the same total value:

Median time which charities spend applying & reporting on a grant of:

Median amount raised per hour spent

No. hours work in raising & managing $100,000

$10,000

12 hours

$833 /hour

120 (three weeks)

$100,000

27 hours

$3,704 /hour

27   (less than four days)

So when you’re choosing charities to support this Christmas, divide your total giving between fewer charities, whatever the scale of your giving.

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  1. Ian Ker says:

    The point about giving is well-made – and becomes even stronger if you can actually persuade the other 68 charities not to waste their (and your) time phoning you to ask for donations.

    However, the transaction costs argument for a philanthropic foundation is less clear, as it is missing a key element – the amount of competition for grants. The larger the grant, the more organisations are likely to compete for it and the more complex will be both the submissions and the assessment process.

    The larger grant might seem more cost-effective, but this advantage is reduced by the change in the probability of being successful. If we assume that the total funding available is fixed and the number of applicants is unaffected by the specific quantum of the grant, the probability of being successful for a $100,000 grant is one-tenth of that for a $10,000 grant, If we further assume that 50% of the charity’s cost is for application and 50% for reporting, a charity will have to spend 148.5 hours (10 * 13.5 for applications plus 13.5 for reporting on the one successful $100,000 grant application) which means the amount raised per hour spent is $673 – less than for the $10,000 grant.

    There is an added problem (or two) from over-reliance on larger grants. First, smaller organisations are likely to be disadvantaged as they are less well-equipped to apply for larger grants and, indeed, might not need them for their particular activities. Second, small grants can often be used to leverage funding from other sources (matching grants) whereas larger grants will often not qualify for such funding.

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