Monday, November 15, 2021

Mayo, Navigating the Notches: Charity Responses to Ratings

Jennifer Mayo (Ph.D. Candidate in Economics, University of Michigan) has posted Navigating the Notches: Charity Responses to Ratings. She summarizes her research in a Twitter thread here. Here is her introduction:

This paper studies both donor and nonprofit responses to the star rating system designed by Charity Navigator. Using IRS Form 990 data from 2002 to 2019, I find that an increase in a charity’s rating from 3- to the highest 4-star rating is associated with a 6% rise in contributions, with larger effects among smaller charities. Some charities respond to the incentives by changing their behavior to try to get themselves above the star thresholds, leading to “bunching” at the thresholds. This response is equal to the effect of charities halving spending on administration. I find that some of the response is due to misreporting of expenses in order to achieve a higher star rating. The analysis suggests that a notched rating system induces greater behavioral change than a continuous measure, but affects a smaller number of charities. Which rating system is preferred depends on the relative value placed on these effects.

Samuel D. Brunson

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