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

Abstract

Problem definition: Charities face tension when deciding whether or not to offer earmarking to donors--i.e., let donors restrict donations to 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 four mechanisms: by (i) giving donors control over their donations, (ii) increasing operational transparency of donations (iii) leveraging highly salient projects and (iv) 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: preference between earmarking and non-earmarking, decision on whether to donate or not (i.e., donor activation) and donation amount. Methodology: We design three online experiments that allow us to quantify and disentangle the effect of earmarking on donors' decisions and investigate the role of the four mechanisms in fundraising. Results: Our results reveal that earmarking has distinct effects on the three decisions donors make. Earmarking activates more donors but it does not always increase donation amounts. Moreover, we determine the conditions under which the four mechanisms affect the outcome of fundraising campaigns. Managerial implications: Our findings provide clear insights for how charities can design fundraising campaigns more effectively and suggest when to leverage earmarking and the four mechanisms depending on the charity's fundraising goals.

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