Indiana University      Research & Creative Activity      January 2000 Volume XXII Number 3

Why Are We Generous?

Understanding the Economics of Altruism

by Michael Wilkerson

Economists, says Mark Wilhelm, an associate professor of economics and philanthropic Studies at Indiana University–Purdue University Indianapolis, “love to find results that are counter-intuitive.” A specialist in the motivations of donors, Wilhelm works in a field that is a wonderland of unpredictable results. Time after time, studies produce conclusions that don’t match hypotheses. While it might be impossible to see into the souls of donors, economists can perform statistical analyses on large groups of donors, controlling the variables so that, in essence, the motivations for giving can be measured.

In most of Wilhelm’s work, which ranges from the study of charities in drought-ravaged Africa to the motivations of voters in curtailing welfare benefits, he seeks to uncover how much we truly care about others—what level of our desire to help is based on altruism. “When you say the world ‘altruistic,’ different people mean different things,” Wilhelm says. “Economists mean that you care about the well-being of the recipient of the aid or service.”

Mark Wilhelm, Associate Professor of Economics and Philanthropic Studies, Indiana University–Purdue University Indianapolis

Motivations of donors, as every fund raiser knows, are often complex and hard to fathom. In his altruism research, Wilhelm excludes organizations like art museums, churches, even universities. “In those cases, the donor often gets something back—services from the church, the chance to attend the museum, perhaps a named scholarship or building.” So while the motivation might be high-minded, it isn’t purely altruistic.

In seeking situations in which altruistic giving is likely to be strong, Wilhelm has focused on targets such as international relief and development organizations, domestic welfare recipients, and children who receive funds from parents. “If you talk about inheritance, a very big intergenerational transfer of wealth is now under way,” Wilhelm says. “A big question in economics is that if you look at the wealth of a country, how much of that comes from transfers between generations? It depends on how you measure, but surprisingly, it’s about 50 percent.”

As Wilhelm is quick to point out, that’s different from saying that each of us receives half our assets from our parents; in fact, a very small part of the population gains enormous wealth that way. For most people that’s not so. “Thus,” he says, “this big intergenerational transfer that everyone is talking about is going to be very unequally distributed.”

Given that inequality, questions abound over how much of the transferred wealth will compensate for inequalities generated by other aspects of the economy. For example, will higher transfers go to children whose own earnings in the labor market are lower than those of their siblings? They will if parents are motivated by altruism because such parents will have a stronger desire to take care of their less fortunate children. But is there any evidence that parents actually do bequeath larger amounts to low-earning children?

In the early part of Wilhelm’s career, such questions were in the distant future. As an electrical engineer at corporations such as GM and RCA, he enjoyed the problem-solving nature of his work. “Engineering was very satisfying at a certain level, but at the same time I wanted to do something that had a deeper meaning. Because of my religious faith, I didn’t want to work in the defense industry, which is where most engineers were going in the early 1980s,” Wilhelm explains. He became attracted to input-output economics, which, “though it’s not usually considered mainstream economics, was work an engineer could relate to.” From there, he began work on a Ph.D. at New York University. After several years on the faculty at Pennsylvania State University, Wilhelm came to IUPUI in 1998. “This is the place to work on altruism because of the Indiana University Center on Philanthropy and because the economics department already has several people working on altruism, nonprofit organizations, and volunteerism. I can’t think of many places that have all this,” he says.

His colleague Richard Steinberg, a professor of economics and associate professor of philanthropic studies at IUPUI who has worked on altruism and nonprofit organizations for most of his career, is joining Wilhelm in a new signature research project for the Center on Philanthropy to learn how not just funds but philanthropic values and behaviors are transmitted, both across generations and from donors to recipients. The ambitious study will examine in detail and over time the volunteering and giving behaviors of several thousand families. It will also examine how a service and philanthropic belief is (or is not) instilled in the recipients of gifts and services. One component of the study will look at those who have participated in service-learning courses in college, examining their tendency to give and volunteer over a number of years far beyond the service-learning class itself.

So far, Wilhelm and his colleagues have learned much about the intergenerational transfer of wealth, using a unique data set from the federal government that links estate tax returns with income information about the beneficiaries of those estates. Within most families, it turns out, parents give or bequeath assets to children on an equal basis, regardless of the children’s economic circumstance. The daughter who is a successful investment banker will get the same inheritance as her sibling, the poet, who struggles to make a living as a cook. In those families, parental motives of fairness and prevention of inter-sibling rivalry far outweigh any sense of economic altruism.
Wilhelm leaves that two-thirds of the population alone and studies the other third, in which the inheritances are different. “An altruistic theory of bequests would say that for every dollar less that the one sibling has, the parent would make that up in a gift or bequest. If the parents are motivated by altruism, meaning that they care about the well-being of their two children, and if they are equally concerned with their children, then you can project exactly how they would divide their money.”

But, as he points out, it doesn’t work that way. Altruism appears to account for only twelve cents of every dollar’s income disparity between children. In other words, the motives of the parents are mixed—what economists would call impure altruism, also known as a mixed-motive model. That key concept has been described by several economists, including Richard Steinberg.

Wilhelm’s work has significant implications for government tax and welfare policies in the future. “Economists are interested in whether voluntary giving will lead to an efficient level of redistribution. Is there room for the government to do more? Can the government accomplish its desired increase in redistribution?” At this point, the data show that the answer is, generally, yes. Because altruism accounts for such a minimal proportion of actual wealth redistribution, government can be assured that, for example, its increase of funding for service agencies or programs will not be countered entirely by compensating decreases in funding by private donors. By the same token, any decrease in government funding in, say, welfare programs, will not be made up for in its entirety by offsetting increases in private aid.

Welfare is also grist for Wilhelm’s research. “Public attitudes change a lot,” he notes. “In the early 1990s, the percentage of people thinking we spend too much on welfare grew to more than 60, and then we had a major change in policy.” He and his collaborator David Ribar, an associate professor of economics at George Washington University, are looking at the states’ spending per welfare recipient and at voter attitudes.

Their welfare work began when Wilhelm and Ribar began to debate the reason for the decline in welfare benefits, which has continued unabated since 1970. “We thought: ‘Maybe people just aren’t all that generous!’ That’s an argument you never see in the policy journals. There’s a lot about out-of-wedlock births and race and other issues, but you never see much of a consideration of whether people just don’t want to give their money to others.”
Knowing that results can so often contradict theory, Wilhelm and Ribar sought to find levels of generosity in welfare changes between 1969 and 1992, and again as a response to the 1996 federal welfare reform. Their predictions, consistent with the surprising findings that giving does not correspond closely with external changes in conditions, are for much lower benefit cuts by states than most policy analysts have forecast. In a third study conducted with Ribar and Robert Moffitt of The Johns Hopkins University, Wilhelm has shown that voters, in criticizing welfare spending, are seeking to keep benefit levels in line with wages for low-skilled workers. Since such positions have tended to pay less in recent years, voters may be trying to lower welfare benefits commensurately.

“We still don’t really know why people support welfare spending,” Wilhelm says. “The data don’t exist, though we’ve had welfare for a long time. It could be altruistic concern for the recipients, a sense of obligation or even guilt, or possibly an inheritance from our national memory of the Great Depression.” Even without that knowledge, Wilhelm’s work has revealed much. “I think the answer to the generosity question is that it is possible that people are very altruistic, yet at the margin, they don’t respond to modest governmental changes. If the government cuts welfare budgets by 10 percent, you’re not going to see much donor or voter response. But if the government eliminated the whole system, that would change the environment so much that the overriding response by the public would be altruism.”

The U.S. Agency for International Development implements the government’s foreign economic and humanitarian assistance programs. In 1997, the USAID provided $1.3 billion to support organizations engaged in international relief and development.

Because of its intention to help the poor, domestic welfare spending is related in Wilhelm’s research agenda with international relief and development. In theory, altruism should manifest itself most dramatically in gifts to agencies such as CARE and Save the Children. “When you give to these agencies,” he says, “you don’t get anything directly back, and it’s unlikely that anyone you know is getting anything directly back. Therefore, in international relief, you should see altruism in about as pure a form as it can be found.”Wilhelm has studied a data set of 128 international organizations over seven years. Examining the data to see if voluntary giving drops when government contributions rise, and vice versa, Wilhelm, again collaborating with David Ribar, finds that even in international relief, altruism is more elusive than theory would predict. “If donors are giving CARE a million dollars for its work in Nigeria, they’re saying in effect that’s what the organization needs; if the government steps in with a $100,000 contribution, the donors should withdraw that amount and use it for some other purpose or cause, according to an altruistic theory of giving,” Wilhelm says.

But, as in the other studies, that’s not what happens in the real world. The amount withdrawn in the above example is about 15 percent of what would be expected, or, in the CARE example, $15,000 instead of $100,000. Therefore, the organization gains $85,000, which its donors had previously not been willing to give. Though it might seem that the quirks of individual organizations and the prevailing political winds in a given region could skew the results, Wilhelm and Ribar control for that by analyzing changes in the donations received over time by the organizations. Even continent-wide events such as a two-year drought are factored into the statistical analyses.

Curiously, his initial results differed from what others have found in laboratory-based voluntary giving situations based on need. In those studies, donors give money in simulated circumstances that, given the statistical controls placed on the experiments, should yield the same levels of altruism as in the real world. But laboratory donors are much more altruistic. Wilhelm decided to go beyond the two most obvious explanations for the variance: that laboratory situations cannot capture complex real-world motives, and that the real-world studies are flawed because of statistical problems that persist even after the use of extensive controls.

Instead, Wilhelm and Ribar argued that both the real-world and laboratory studies are consistent with a mixed-motive model of giving. They found that responses to need are related to the number of other donors involved. If government increases its contribution to a cause by one dollar, the first donor, whose motives include a lot of altruism but some other factors, withdraws 70 cents of his donation. The next donor would respond not just to the government’s alteration of support but also to the first donor’s, thus modifying her response, and so on through hundreds of donors. “Once you string together a series of these donors, each responding to the charity’s situation after the previous donation, at some point the aggregate response is that they offset the government contribution entirely (by lowering their contribution by one dollar) just as a theory based on pure altruism and not mixed motives, would have predicted. Yet this is in stark contrast to the 15-cent reduction Wilhelm and Ribar found in their international study.

But, Wilhelm notes, much more is going on. As the total of the gifts increases, each donor’s mixture of motives will change. If enough of us give to Save the Children, for example, the next person lined up to donate will see the pure need as having been met and will therefore give from some other motive than altruism. Those motives could include peer pressure, the joy of giving, obligation, guilt, even self-interest (perhaps the donor has a business in the affected country). But whatever the motive is, as it increases in strength relative to altruism, donors will be less inclined to reduce their contribution in response to additional government support.

“The altruistic theory—that we are moved to give where giving is needed—has such a strong intuitive appeal that it is difficult to think of non-altruistic alternative explanations of giving,” Wilhelm says. “Difficult, that is, unless you are an economist.”