Giving – in-kind or cash? (Development and Macroeconomics)

donation 2Whether and how givers seek to influence or control the consumption patterns of gift recipients. Researcher: Cátia Batista

The motives behind giving

In both rich and poor countries, transfers of resources across individuals and across households are common and often large in magnitude. In developing countries in particular, inter-household transfers play an important role in replacing public transfers when those public sources are not available. Similarly, informal transfer and credit relationships between households also augment missing insurance markets in developing countries.

In this context, it is important to understand the motives behind giving. In addition to standard motives of giving, such as the rate of return on giving or the size of the endowment, we examine the importance of directed giving (in-kind) relative to giving in cash only. Standard models of giving imply that givers, who may not be fully aware of recipient preferences, cannot do better at raising recipient utility than by giving cash (as opposed to making in-kind gifts), which allows recipients to make utility-maximizing consumption choices on their own. The prevalence of in-kind giving is therefore a puzzle for very standard theoretical models. Our work provides the first direct experimental evidence supporting a class of paternalistic models that generate motives for directed giving.

In-kind or cash?

This fundamental research question is investigated using a lab-in-the-field experiment with large stakes. Study participants in urban Mozambique play dictator games where their counterpart (the recipient of gifted funds) is the closest person to them outside their household. Experimental rounds vary on, among other things, whether giving to the counterpart can be in cash alone, or can be either cash or in-kind (with options ranging from education to grocery, or construction materials and agricultural inputs, among others). One of the choices made by each respondent is, at the end of the experiment, chosen at random to be implemented in reality.

This setting allows a rigorous study of the determinants of giving for individuals facing actual giving decisions over an amount that is significant relative to their overall budget. Our focus on transfers between members of a social network is particularly relevant and distinguishes our research from the vast majority of dictator game experiments on willingness to give anonymously to unknown recipients with whom no future interaction is expected.

Key Results

- When given the option, individuals choose to do a large fraction of giving in kind (in the form of goods) rather than cash
- In addition, they share more in total when they have the option of giving in kind, compared to giving that can only be in cash. 
- Standard economic determinants such as the rate of return to giving and the size of the endowment also affect giving, but the effects of even large changes in these determinants are significantly smaller than the effect of the in-kind option.
- Qualitative post-experiment responses suggest that the in-kind effect is driven by a desire to control how recipients use gifted resources
- Our results support paternalistic theories of giving where the utility of givers depends on the composition (not just the level) of gift-recipient expenditures, and givers thus seek control over transferred resources.

Real World and Policy Implications

- Directed giving motives imply that real-world transfers may be affected by regulatory or technological developments that facilitate givers’ control over recipient consumption. For example, new technologies such as the Internet facilitate in-kind giving over distances (via online merchants), and telecommunications can improve long-distance monitoring of transfer recipients.
- In the legal realm, trusts and other legal instruments allow givers to place limits on how recipients can use inter-vivos transfers and bequests.
- In the charitable giving context, directed giving motives might explain the strategy of soliciting donations for specific, defined uses, rather than general ones.

This article is based on the paper "Directed Giving: Evidence from an Inter-Household Transfer Experiment in Mozambique" by Catia Batista (Nova SBE), Dan Silverman (Arizona State University) and Dean Yang (University of Michigan), NBER Working Paper 20605, October 2014.


 Date Posted: Feb 2015