Seeds to succeed?

• Published in: Journal of public economics 2011-06, Vol.95 (5), p.416-427
• Main Authors: Bracha, Anat, Menietti, Michael, Vesterlund, Lise
• Format: Article
• Language: English
• Subjects: Charitable giving; Charitable organizations; Charity; Coordination; Donation; Equilibrium; Experiments; Fund-raising; Fundraising; Modelling; Production costs; Public goods; Seed money; Sequential giving; Strategic planning
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2010.10.007

The public phase of a capital campaign is typically launched with the announcement of a large seed donation. Andreoni (1998) argues that such a fundraising strategy may be particularly effective when funds are being raised for projects that have fixed production costs. The reason is that when there are fixed costs of production simultaneous giving may result in both positive and zero provision equilibria. Thus absent announcements donors may get stuck in an equilibrium that fails to provide a desirable public project. Andreoni (1998) demonstrates that such inferior outcomes can be eliminated when the fundraiser initially secures a sufficiently large seed donation. We investigate this model experimentally to determine whether announcements of seed money eliminate the inefficiencies that may result under fixed costs and simultaneous provision. To assess the strength of the theory we examine the effect of announcements in both the presence and absence of fixed costs. Our findings are supportive of the theory for sufficiently high fixed costs. ► We test if sequential giving is preferred when costs are fixed (Andreoni 1998). ► Behavior in an experiment is consistent with the theory when fixed costs are high. ► Strategic uncertainty can be eliminated by singlehandedly covering the fixed cost. ► This occurs when fixed costs are low; causing sequential moves to decrease giving. ► Uncertainty persists with high fixed costs and sequential move secures provision.