A Theory of Outsourced Fundraising: Why Dollars Turn into 'Pennies for Charity'
Charities frequently rely on professional solicitors whose commissions exceed half of total donations. To understand this practice, we propose a principal-agent model in which the charity optimally offers a higher commission to a more “efficient” solicitor, raising the price of giving significantly. Outsourcing is, therefore, profitable for the charity only if giving is very price-inelastic. This, however, clashes with empirical evidence. We show that paid solicitations can benefit the charity if: (1) donors are unaware; (2) donors have intense “warm-glow” preferences; or (3) the charity worries mostly about watchdog ratings. We argue that informing the public of the mere existence of paid solicitations may be the most effective policy available.
Economic Research Initiatives at Duke (Erid) Working Paper