Good Cause, Bad Behavior

Doctoral researcher finds where charity begins –– and sometimes ends

For the more than 1.5 million registered nonprofits whose provision of public goods depends on the generosity of those they serve, philanthropy isn’t a game. But that doesn’t mean the top management at some organizations won’t occasionally play by their own rules.

In his work for Krannert’s Vernon Smith Experimental Economics Laboratory, doctoral student Justin Krieg is using game theory to measure how the behavior of these public “agents,” such as charity executives, might impact the behavior of individual donors –– including their level of giving.

Building on research that uses what is known as a Voluntary Contribution Mechanism (VCM) game, Krieg employs student volunteers in a standard series of hypothetical group settings that simulate philanthropic giving and contributing behavior. His introduction of an agent, however, extends the theoretical outcomes to new and increasingly significant areas of discussion.

“In naturally occurring settings, group contributions are collected, managed and invested by the employees of the nonprofit, by the civil servants or other agents tasked with ensuring public good,” Krieg explains. Recent scandals in the sector, which is largely composed of public charities, underscore the issue’s importance.

“These scandals, which often involve a single employee using voluntary donations for private consumption, have occurred at numerous local organizations as well as several prominent national organizations,” he says.

Justin Krieg

Video Extra: Learn more about Justin Krieg's research using the Voluntary Contribution Mechanism (VCM) game.

“Given the unique economic and social role that nonprofits play in society and the high profile nature of such activity, it’s not surprising that the sector has seen an increase in regulatory attention at both the federal level and state level.”

Sadly but predictably, the public scrutiny has come at a high cost, especially during the recession and to those most in need. According to the National Center for Charitable Statistics, total private giving in 2009 fell to $303.8 billion, down 3.6 percent from 2008. The decline follows a decade (1998 to 2008) when the inflation-adjusted revenues of U.S. nonprofits grew by almost 40 percent –– only to be countered by a nearly 46 percent increase in reported expenses.

Attempts to restore trust by strengthening legislative oversight and increasing information disclosures are ongoing, and –– thanks to a doctoral research grant from the National Science Foundation –– so are Krieg’s agent-driven VCM experiments.

“This research could have important practical implications for the regulation of nonprofit enterprises and for understanding the potential behavioral effects of both the subjects whom contribute to the public good and those entrusted with its production,” he says.

And with more charitable organizations than ever competing for a limited pool of contributions, the implications for the bottom line should gain the attention of nonprofit managers.