Charitable giving of alumni: micro-data evidence from a large public university

American Journal of Economics and Sociology, The,  Jan, 1994  by Albert Ade. Okunade,  Phanindra V. Wunnava,  Raymond Walsh, Jr.

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I

Introduction

BECAUSE OF RECENT SHORTFALLS in funds for higher educational institutions at all government levels (U.S. Congress, Senate, Committee on the Budget, 1987), determining the factors which influence alumni gifts to higher education becomes more important. Currently, public financing of higher education continues to worsen nationwide.(1) Academic institutions must tap into their alumni's wealth to maintain or increase funds for academic programs. While external corporate donors may be more motivated to support higher education when alumni contributions to the alma mater are high, this research examines only alumni personal charitable donations.

In a life-cycle model of charitable contributions, individual donations are viewed as recurrent consumption outlays for nondurable goods and services (Meyer, 1980, 217) and are expected to increase with the donor's age. Charitable donations also tend to increase with donor incomes (or earnings) and marginal income tax rates (Kitchen and Dalton, 1990). These determinants usually increase over the donor's working life. Accurate information on donors' incomes are rarely available, however.

Due to data limitations, past researchers (Grant and Lindauer, 1986; Olsen, Smith, and Wunnava, 1989) proxied income with age to approximate the lifecycle of alumni giving. However, because an individual's income elasticity for charity may differ from his or her elasticity of charitable giving with respect to age, the life-cycle profile of alumni donation may not coincide with the age-income profile of the donor. Consequently, this study departs from past practice by focusing instead on the age-giving profile of alumni donors. The modeling framework adopted here allows the determination of the time period within which the growth rate of alumni gifts is expected to remain positive and whether or not this follows donors' age-income profiles. Consequently, the study results can be useful for projecting alumni donations and for identifying the gift-enhancing attributes of the alumni. Moreover, unlike past research, this study is unique in that individual-specific micro-panel data (i.e., following given cross-sections of donors over time) of a large public university are used. Consequently, the effects on giving of a donor's gender, college of major, graduation with (or without) honors, graduate education (and where obtained), involvements in campus Greek clubs and other non-Greek organizations, etc., are evaluated here. How the business cycle and a 1962 Federal Court Order to desegregate the university racially affected alumni donations are also evaluated.

II

Review of Related Literature

SEVERAL THEORETICAL FRAMEWORKS exist for modeling charitable donations. There is the economics of charity approach based on the theory of consumer demand for a nondurable good or service. This approach focuses on the price and income effects of voluntary charitable donations (Feldstein and Taylor, 1976) and also enables researchers to evaluate how changes in the tax policy affect the level of charitable contributions (Hood, Martin, and Osberg, 1977; Feldstein, 1975; Glenday, Gupta, and Pawlak, 1986; Kitchen and Dalton, 1990). A second approach rests on the contention that charity-giving individuals are driven by a sense of obligation to provide collective goods and services for the society through say, the United Way (Keating, 1981). In a third approach, charitable contributions are viewed as "payments" in exchange for intangible personal rewards of self-esteem or group membership (Keating, Pitts, and Appel, 1981; Zaleski and Zech, 1992). Finally, Becker's (1974) theory of social interactions posits interdependent utility functions for unrelated individuals as the motive for charitable giving.

These seemingly divergent rationales for voluntary personal charitable donations to non-profit entities are fully compatible with the utility maximization framework. That is, each donor can be said to derive some utility (or satisfaction) from giving to charities, regardless of the specific motive for giving. Since alumni are individuals with wide ranging motives for donating, the utility-based theories appear to be globally compatible when modeling alumni charities using micro-data.

The applications of charity economics to higher educational institutions that postulate the demand-related life-cycle hypothesis for alumni are scanty. Two recently published empirical studies of four-year liberal arts colleges are Grant and Lindauer (1986) and Olsen, Smith, and Wunnava (1989). Feldstein's study of income tax and charitable donations as they relate to religious, educational, and other organizations concluded that gifts to educational institutions are very sensitive to the cost of giving (Feldstein, 1975, 209). Kitchen and Dalton (1990) researched the determinants of charitable donations by families in Canada, and how charitable giving is affected by the substitution of credits for tax deductions (p. 298). Grant and Lindauer (1986) studied how the tax treatment affects alumni giving. They found that: (i) the growth rate of alumni giving eventually declines with donor age (however, the point at which it begins to decline does not coincide with the typical retirement age), and (ii) factors other than income and marginal income tax rates affect alumni donations (Grant and Lindauer, 1986, pp. 131-132). These findings motivated the Olsen-Smith-Wunnava (1989) study, which found alumni gifts to be especially higher than average during reunion years with a correspondingly lower amount of total charities following reunion years (pp. 61-62). Grant and Lindauer (1986, p. 137), however, earlier cautioned that "... anticipation of reunions may cause a pre-reunion decrease in gifts and number of donors while post-reunion responses may also produce shortfalls from trend projections."