William T. Harbaugh

Neural responses to taxation and voluntary giving reveal motives for charitable donations.

Civil societies function because people pay taxes and make charitable contributions to provide public goods. One possible motive for charitable contributions, called “pure altruism,” is satisfied by increases in the public good no matter the source or intent. Another possible motive, “warm glow,” is only fulfilled by an individuals own voluntary donations. Consistent with pure altruism, we find that even mandatory, tax-like transfers to a charity elicit neural activity in areas linked to reward processing. Moreover, neural responses to the charitys financial gains predict voluntary giving. However, consistent with warm glow, neural activity further increases when people make transfers voluntarily. Both pure altruism and warm-glow motives appear to determine the hedonic consequences of financial transfers to the public good.

What do donations buy?: A model of philanthropy based on prestige and warm glow

Abstract Charities publicize the donations they receive, generally according to dollar categories rather than the exact amount. Donors in turn tend to give the minimum amount necessary to get into a category. These facts suggest that donors have a taste for having their donations made public. This paper models the effects of such a taste for “prestige” on the behavior of donors and charities. I show how a taste for prestige means that charities can increase donations by using categories. The paper also discusses the effect of a taste for prestige on competition between charities.

The Carrot or the Stick: Rewards, Punishments and Cooperation

We examine rewards and punishments in a simple proposer-responder game. The proposer first makes an offer to split a fixed-sized pie. According to the 2×2 design, the responder is or is not given a costly option of increasing or decreasing the proposers payoff. We find substantial demands for both punishments and rewards. While rewards alone have little influence on cooperation, punishments have some. When the two are combined the effect on cooperation is dramatic, suggesting that rewards and punishments are complements in producing cooperation. Providing new insights to what motivates these demands is the surprising finding that the demands for rewards depend on the availability of punishments.

Bargaining by Children

We study the development of bargaining behavior in children age seven through 18, using ultimatum and dictator games. We find that bargaining behavior changes substantially with age and that most of this change appears to be related to changes in preferences for fairness, rather than bargaining ability. Younger children make and accept smaller ultimatum proposals than do older children, Even young children are quite strategic in their behavior, making much smaller dictator than ultimatum proposals. Boys claim to be more aggressive bargainers than girls do, but they are not. Older girls make larger dictator proposals than older boys, but among younger children the proposals differ much more by height than by sex. We argue that the existence of systematic differences in bargaining behavior across age and sex supports the argument that culture is a determinant of economic behavior, and suggests that people acquire this culture during childhood. We argue that the height differences indicate that forces other than culture, in the usual sense of the word, are also important.

Risk attitudes of children and adults: choices over small and large probability gains and losses

In this paper we examine how risk attitudes change with age. We present participants from age 5 to 64 with choices between simple gambles and the expected value of the gambles. The gambles are over both gains and losses, and vary in the probability of the non-zero payoff. Surprisingly, we find that many participants are risk seeking when faced with high-probability prospects over gains and risk averse when faced with small-probability prospects. Over losses we find the exact opposite. Childrens choices are consistent with the underweighting of low-probability events and the overweighting of high-probability ones. This tendency diminishes with age, and on average adults appear to use the objective probability when evaluating risky prospects.

Are Adults Better Behaved Than Children? Age, Experience, and the Endowment Effect.

We find that large increases in age do not reduce the endowment effect, supporting the hypothesis that people have reference-dependent preferences which are not changed by repeated experience getting and giving up goods.

Altruism in Experiments

Unlike experiments on markets or mechanisms, experiments on altruism are about an individual motive or intention. This raises serious obstacles for research. How do we define an altruistic act, and how do we know altruism when we see it?

The Menstrual Cycle and Performance Feedback Alter Gender Differences in Competitive Choices

We use a within-subjects experiment with math and word tasks to show that relative performance feedback moves high-ability females toward more competitive forms of compensation, moves low-ability men toward less competitive forms, and eliminates gender differences in choices. We also examine females across the menstrual cycle and find that women in the high-hormone phase are more willing to compete than women in the low-hormone phase. There are no significant differences between choices after subjects receive feedback. Thus, biological differences lead to economically significant differences, but the impact of those differences can be lowered through relative performance information.

The Fourfold Pattern of Risk Attitudes in Choice and Pricing Tasks

We examine the robustness of the fourfold pattern of risk attitudes under two elicitation procedures. We find that individuals are, on average, risk-seeking over low-probability gains and high-probability losses and risk-averse over high-probability gains and low-probability losses when we elicit prices for the gambles. However, a choice-based elicitation procedure, where participants choose between a gamble and its expected value, yields individual decisions that are indistinguishable from random choice. Sensitivity to elicitation procedure holds between and within participants, and remains when participants are allowed to review and change decisions. The price elicitation procedure is more complex; this finding may be further evidence that an increase in cognitive load exacerbates behavioural anomalies.

Neuroeconomics of Charitable Giving and Philanthropy

Publisher Summary This chapter focuses on voluntary decisions about charitable giving. Most charity involves what economists call public goods. The bulk of the evidence from empirical and experimental studies supported the existence of a purely altruistic motive for charitable giving, but that in societies of more than 20 or so people this motive lost its force, and could not explain the widespread giving. The combination of Pure Altruism and warm-glow known as Impure Altruism was an appealing alternative model, and also why alternative explanations based on repeated play, reciprocity, and signaling might too be consistent with the data. Taxation raises a set of issues that has not yet been addressed in neuroeconomics. Tax compliance is one example. Most economic studies show that tax cheating is far lower than would be expected if people simply weighed the benefits against the small chances of getting caught and the low subsequent penalties. Thus, it seems likely that people pay taxes at least partly out of a sense of obligation, if not exactly altruism.