Why Do Small Donors Give Now, But Large Donors Give Later?
Some people have observed that small and large donors follow different giving patterns. Small donors who give out of their salary—that is, most people—tend to donate money more or less as soon as they earn it (usually within a year). Large donors—e.g., extremely wealthy people and foundations—tend to slowly distribute their money and hold on to most of it1. For example, large foundations typically donate little more than the legally required 5% of assets each year. Why do they behave differently?
I don’t believe this difference is surprising, and actually it’s not really even a difference.
A high net worth individual, or a rich foundation has assets worth a lot of money. But a young person at the start of their career has a valuable asset: their future earning potential. Think of your career as like a bond: it’s an asset you hold that distributes money to you at regular intervals. If a rich donor holds bonds and then donates a portion of the distributions, that’s just like you donating portions of your “career bond” distributions (i.e., your salary).
Rich donors with lots of assets can choose to donate all their money immediately and forgo any interest income. Salaried donors can do something similar: they can borrow a bunch of money to donate now and repay the loan using their future salary. (In theory this is mathematically equivalent to the rich donor who gives all their money away quickly, but in practice it doesn’t work as well because most people can’t easily take out long-term loans at low interest rates.)
We can classify temporal giving strategies into roughly three categories:
- Give as much as you can right now.
- Spread out your giving over time.
- Save up your money to donate as late as possible.
(Of course, donors can fall on a continuum between strategy 1 and strategy 3, but we can roughly classify people’s giving behaviors into these three categories.)
Naively, it appears that small donors follow strategy 1 while large donors follow strategy 2. But in fact, both typically follow strategy 2. Small donors effectively spread out their giving by earning a salary over a long time period and donating a portion of the salary as it comes in.
This is not to say that donors behave optimally. The takeaway is that small and large donors at least behave consistently with each other, even if it might not appear so on the face of things.
As a small donor earning a salary, I know that if I donate all my money right now, I will get another chance to donate more money next year. Some large donors, such as foundations, already have most of the money they will ever receive. By spreading out their donations over time, they preserve the opportunity to make new giving decisions in the future–the same opportunity that salaried donors have.
Naturally, this does not describe all donors, but it’s a general pattern. ↩