6.1 Chapter introduction

Despite the Covid-19 pandemic, or perhaps because of it, charitable giving in the United States reached an all-time high in 2020: $471 billion, a 15% increase over the previous year.^[1]

Perhaps this shouldn’t be a surprise, but nonprofit organizations usually need financial resources in order to meet their mission as organizations. Larger organizations need to pay staff salaries, pay to implement their programs and pay rent and utilities. Even small, community-based organizations without staff often require a modest budget to be able to implement their plans – from purchasing necessary supplies and equipment, to marketing their work (printing flyers and brochures, media campaigns), to reimbursing volunteers for travel expenses. It seems sometimes that nonprofit organizations are always on the hunt for more resources to support their work.

In this chapter, we will discuss the various revenue streams that organizations use to raise the funds they need. We will also cover some of the leading theories that explain why people give money to nonprofit organizations. We will finish with a short discussion of some of the critiques of philanthropy in the United States and around the world.

6.2 Defining philanthropy and charitable giving

Although I think we all know what philanthropy means, there is quite a bit of diversity for the terms used by scholars and practitioners. Merriam-Webster defines philanthropy as “goodwill to fellow members of the human race.” While it usually relates to financial donations, sometimes “gifts” of time (volunteering) is also included (see Chapter 5 for more on volunteering).^[2] It is often perceived as altruistic, benefitting others.

When people think of philanthropy, they often first think of wealthy individuals who give a significant amount of their wealth away through one form or another – from a single gift to a favorite organization to setting up a family foundation in their name. Those foundations then make their own grants to organizations, sometimes for decades or longer. Take a look at MacKenzie Scott as she seeks to give away a significant proportion of her wealth.

Charitable giving, on the other hand, often means any gift of money, time, goods or services to those in need. It also usually refers to individual gifts, rather than institutional gifts from foundations or corporations.

Both scholars and practitioners often use these two terms – philanthropy and charitable giving – interchangeably.

6.3 Why people give

One of the big challenges facing scholars who study charitable giving and philanthropy is understanding why people donate money to causes and organizations that they do not directly benefit from. Classical economics would argue that charitable giving is irrational. That is, in an effort to maximize their own best interest, or maximizing their utility, individuals shouldn’t be expected to give away their wealth with no expectation of any benefit in return. There are several different theories to explain why otherwise self-interested individuals will give money away.

Public goods provision. Economists argue that individuals desire a certain level of public goods in their communities (such as education, the arts, human services), and they will contribute their own money to support the provision of these services up to the point where government steps in to support the provision of the good. In this way, government provision could be seen as crowding-out private philanthropy.^[3] In other words, every dollar of government provision for a public good will lead to donors giving one dollar less in charitable giving. Yet, research has found that people do tend to contribute past the point of government funding, leading to only a partial crowding-out.^[4]

Impure Altruism and Warm-glow. Economist James Andreoni argued that individuals are rarely purely altruistic.^[5] That is, they don’t engage in charitable giving with no real expectation of a benefit. Rather, people are engaged in what he calls impure altruism. He suggests that individuals often give to charity because doing so makes them feel good – what he calls a warm glow. This outcome is a powerful benefit received by the donor that can incentivize them to give away a part of their wealth.

Reputational Concerns. Outside of making a donor feel good, charitable giving can also improve one’s reputation in the community. Since people want to be seen as “good,” charitable giving is one way someone can demonstrate that they are a good person that can be respected.^[6]

Signaling. Related to reputational benefits, wealthy people might give financial gifts to organizations in order to signal, or demonstrate, their wealth to their communities.^[7]

Peer Pressure. Individuals are influenced by peer pressure; they want to behave in similar ways to others. One tool that has been shown to influence charitable giving is called social information – when giving behavior of others is shown to potential donors, they tend to give in similar ways.^[8]

6.4 How else do organizations raise money? 

Believe it or not, individual, foundation and corporate donors give less than 20% of the money that flows into the nonprofit sector every year. Donations from individuals only account for 9% of the nonprofit sector’s revenue.

_{Image: Nonprofit Impact Matters [pdf] (2019) by the National Council of Nonprofits}

What surprises you about the image above? To me, the fact that private foundations only account for 2.9% of the revenue of the nonprofit sector is surprising. Corporate donations, too, account for less than one percent!

Instead, the vast majority of the money that nonprofit organizations receive every year – upwards of 80% of it – comes from either government contracts/grants or fees for service.^[9] Government contracts and fees for service are often called earned income, where there is a payment of some sort in exchange for a service provided by the organization. Under the fees for service category above, the largest proportion are the fees private insurance pays for medical care and tuition for nonprofit colleges and universities. However, it can also include tickets to a musical concert, or a museum, or the sales at thrift stores run by nonprofit organizations.

One form of earned income, and one that is growing, is social enterprises. We will discuss social enterprises in much more detail in Chapter 8, but for the purpose of fundraising, a social enterprise can be any organization that uses the market to create social value. In this case, any nonprofit that seeks to generate additional money through sales of a good or service could be included in our definition of social enterprises.