To Earmark or to Non-Earmark? The Role of Control, Transparency and Warm-Glow

Abstract

Charities face tension when deciding whether or not to earmark donations; i.e., allow donors to restrict the use of their donations for a specific purpose. Research shows that earmarking decreases operational performance because it limits charities’ flexibility to use donations. However, there is also a common belief that earmarking increases donations. Earmarking is assumed to increase donations through three mechanisms: by (i) giving donors control over their donations, (ii) increasing operational transparency of donations and (iii) changing donors’ levels of altruism and warm-glow. To resolve this tension, we study how, when, and why earmarking affects donors’ decisions. We consider three important decisions donors make that impact the fundraising outcome: (i) preference between earmarking and non-earmarking, (ii) decision to donate or not (i.e., donor activation) and (iii) the donation amount. We design three online experiments that allow us to quantify the effect of earmarking on donors’ decisions and to investigate the role of the three aforementioned mechanisms in fundraising. Our results reveal, for example, that earmarking activates more donors but it does not always increase donation amounts. In addition, we determine the conditions under which the three mechanisms affect the outcome of fundraising campaigns. Our findings provide actionable insights for how charities can design fundraising campaigns more effectively and suggest when to leverage earmarking and the three mechanisms depending on the charities’ fundraising goals.

Keywords: earmarking, donations, operational transparency, warm-glow, behavioral operations