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Economics, Altruists, and Giving Bill Harbaugh Economics, University of Oregon joint work with Ulrich Mayr, UO Psychology

My compassion history: •  Facial recognition skills: not so good. •  Worse, I’m an economist. Economists like clean, simple models. •  Compassion is messy, complicated. •  So, I am only studying compassion because it is necessary. 2

Simple economics: •  The basic insight of economics is that we can harness self-‐interest to make a beHer world for everyone. •  We set up the market rules so that people can sell what they can produce to others who value it. •  And they can keep part of that value for themselves. •  This works because market prices provide both incenKves and informaKon to both the sellers and the buyers.

But: •  Costs someKmes spill over and harm others: ExternaliKes, such as polluKon. •  Some important things can t be produced without beneﬁKng even people who don t pay the costs: public goods. •  So prices fail to provide informaKon and incenKves.

A example of a public good: •  Most people care about the poor. •  But their well-‐being is a public good – so it’s underprovided. •  What to do about this? •  Charity or taxes.

Charitable giving and taxes: Giving: 68% of US families give something 2.2 % of their income, on average 0.8% in UK 0.3 % in Germany 0.1 % in France Taxes: 35% in US, 50% in Europe.

Giving varies With income: < $ 10,000, give 5 % of income ~ $ 45,000, give 1 % > $100,000, give 3 % With age: ~ 30, give 2 % ~ 65, give 4 % Increases with educaKon

Why might rational people give? •  Pure altruism: U = U(x, G) –  x is the amount of your private consumption, G is the amount of the public good –  So, give to increase the level of the good. –  Predicts crowding out, free-riding, zero giving by most people. •  Warm glow: U = U(x, g) –  g is amount you give towards the public good –  Works empirically, but ad hoc •  (Which motive is more altruistic?)

Neuro-‐economic experiment: Study what people do, not at what they say. ParKcipants start with $100: •  Transfers of money from the subject to a local food bank •  SomeKmes mandatory – like taxes •  SomeKmes voluntary – like charitable giving We vary the price of giving: •  SomeKmes $15 turns into $45 •  SomeKmes $45 turns into $15 9

Demand for giving slopes down How often people give

Cost to the giver of giving away $1

Giving is raKonal •  People balance the cost to themselves and the beneﬁt to others. •  But why do they care about the beneﬁt to others? •  Instead of asking them, we tax them, give the money to charity – no choices. •  And we image brains while we do this. •  Compare neural acKvaKon when they get money with acKvaKon when money goes to public good.

Neural eﬀects of taxaKon “Reward circuitry” activation: Yellow: $ to Self Blue: $ to Charity Green: Overlap

Mandatory taxation to pay for a public good activates the same neural “reward circuitry” as does $ to the self

And degree of activation predicts giving Egoists: highrr activation from own gains

Altruists: higher activation from charity gains

R2 = 27%, p=0.02 Altruists give nearly twice as often as egoists

Economics: Marginal Rate of Substitution egoistic :

altruistic:

reject

Also find evidence for warm glow: Activation is higher for a voluntary gift than for a tax

Conclusions: •  Getting money, pure altruism from seeing the charity get money, and warm glow all activate similar reward areas in the VTS. •  People prefer to pay for a public good with voluntary giving, rather than mandatory taxation - and this is only in part because if it’s voluntary, they don’t have to give. •  MRS, measured as % increases in BOLD response in reward areas, predicts who will give. This supports pure altruism. •  Extra activation in the Voluntary treatments, controlling for payoffs, supports warm glow motive. 16

Is it better to give than to receive? Good models of charitable giving must incorporate something about the effects of gifts on recipients. In some ways receiving charity is the mirror image of giving: Money is a cost to the giver and a benefit to the receiver. People give despite the cost, because they get other benefits â&#x20AC;&#x201C; pure altruism, warm glow, prestige â&#x20AC;&#x201C; that exceed the cost. 17

So, if the giver’s cost is a benefit to the recipient, are the giver’s benefits costs to the recipient? •  warm glow of giving / shame of needing help? •  prestige benefit of public giving / public stigma of public receiving? Our neural evidence on giving corroborates economic models – models that came from observable choice data. But with receiving, often there is no choice data. So this is an area where neuro-economics may make a 18 unique contribution.

Subjects and Design •  Sample of undergraduates already receiving financial aid. –  N=20, mixed genders. –  Recruited because they are moderately high need and moderately high academic merit. Screened with FAFSA and transcript. –  GPA between 3 and 3.8., eligible for some, but not max Perkins grant. –  Told that they may be given need or merit based scholarships ranging from $50 to $150. –  Done in an fMRI scanner

Each subject has 96 trials: •  •  •  •

60 mandatory 36 voluntary, where they can decline assistance One of each type counts for payoff Could receive as much as $300 plus showup Your scholarship reduces the amount available for other eligible students.

•  But amount of that reduction varies from $50 to $150 •  Salient and ecologically valid payoffs. 20

Main Cue •  Amount of scholarship, cost to others. •  Choice or No choice •  Choice or acknowledge buttons appear after 10s

Neural Results Preliminary, 18 subjects analyzed with FSL. GLM includes EV s for Mandatory, Voluntary In voluntary, Accept / Reject are separated. Parametric measure of efficiency: scholarship amount - cost to others

Deciding: Voluntary vs Mandatory

Controlling for amount of money, cost to others, qualification test: More activation in affective and evaluative areas.

Activation while deciding (Voluntary): Accepted aid

Declined aid

Nucleus Accumbens

Anterior Insula (Left) 29

Efficiency of the aid: (Scholarship – Cost)

NACC and PFC activation when Scholarship > Cost

Same in the mandatory case – where there s no decision.

What about the qualified distinction?

Again, NAcc and PFC activations are higher when you are qualified for the aid. 31

Conclusions: Giving is voluntary, so charity must be good for people who choose to give. Marginal effects work too - they give more when it s efficient, more when it s public. But every act of charity has a recipient as well as a giver. Receiving aid is not always voluntary. So we can t always use the rational choice / revealed preference argument to say that the receiving side of charity is always utility maximizing. We need neuroeconomics.

Giving people a chance to accept or reject aid activates affective and evaluative areas, as in charitable giving decisions. We find different neural reactions to accepting and to rejecting charity: –  reward area activation precedes transfers that are accepted –  insula activation precedes transfers that are rejected

And we find higher activation in dopaminergic reward related areas when costs to others are lower and when the recipient is qualified for the aid.

Implications: There are costs to receiving aid. Sometimes those costs exceed the value of the money. Sometimes it is better to give than to receive. Costs of receiving can be varied by telling people that the aid they will receive is costing other people a lot â&#x20AC;&#x201C; particularly other people who are more needy than they are. We can reduce those costs: Maimonides, Homeless News, Liberation Theology. 34