Measuring transaction costs one charitable donation at a time

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A concerted effort is being made by institutions like the World Bank to quantify various types of transaction costs incurred by businesses (Doing Business, Enterprise Surveys). The rationale for focusing on transaction costs (and reducing them) is usually couched in mainstream economic concerns. That is, in an attempt to increase growth rate of GDP per capita, create jobs, reduce poverty, and so on.

However, there are many social activities containing costs that are not being accounted for in these surveys. Charitable giving, not the favorite of mainstream economists, is one such transaction. The role charitable donations play in alleviating poverty and helping the economically distressed should not be overlooked. For those of us closely associated with the task of building indicators, the key question is whether the costs associated with a given non-mainstream exchange like charitable donations are significant enough to warrant a closer look.

A recent study by Huck and Rasul (2010) provides a useful starting point for addressing this. The study looks at fundraising campaigns that use mail solicitations and measures the responses of the recipients (potential donors).  It then examines how adjusting variables that directly affect the transaction costs influence the recipients’ responses.  The transaction costs considered are of two different types: ex ante costs, which prevent recipients from even considering making a donation (e.g., too busy to open the mail-out letter to find out the purpose of campaign), and ex post costs, which prevent recipients from implementing their decision to make the donation (e.g., high monetary cost of transferring funds, high time cost of filling out donation form).

The study finds a strong negative correlation between transaction costs and positive responses to the mail solicitations. In the absence of transaction costs, between 6% and 7% of solicitees would make a positive donation, compared with the actual response rate of between 3% and 4%. In other words, nearly one out of every two recipients experience sufficiently high enough transaction costs that prevent them from responding positively to the campaign.  Chances of a positive response increase even more dramatically with reductions in the ex post transaction costs; even a small reduction in ex post costs increases the likelihood of a positive response by as much as a quarter.

The findings of the study really whet my appetite on the subject.  I find myself considering the following questions: Do the existing transaction costs indicators adequately capture the transaction costs of charitable donations and more broadly, the non-profit sector? If they do not, should we give a priority to focusing on measuring transactions costs of non-mainstream and non-economic exchanges such as charitable donations?


Mohammad Amin

Private Sector Development Specialist

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