The informational value of sequential fundraising

This paper examines a puzzling inconsistency between the theoretical prediction of private provisions to public goods and actual fundraising behavior. While fundraisers often choose to announce past contributions, economic theory predicts that contributions will be largest when donors are uninformed of the contributions made by others. This paper suggests that an announcement strategy may be optimal because it helps reveal the charity's quality. It is shown that when there is imperfect information about the value of the public good and contributors can purchase information regarding its quality, then there exist equilibria in which an announcement strategy is optimal. Interestingly, in equilibrium a high-quality charity receives contributions that exceed those that would result had the quality of the charity been common knowledge. Hence, an announcement strategy not only helps worthwhile organizations reveal their type, but it also helps the fundraiser reduce the free-rider problem. (C) 2001 Elsevier Science B.V. All rights reserved.