This article was first published by Freakonomics and is co-authored with Phil Buchanan
As any 10-year-old can tell you, multiplication is commutative: 2 x $70 is the same as 70 x $2.
But not in charitable giving, it turns out. Making two donations of $70 is a good deal more valuable to charity than making 70 donations of $2.
The reason lies in the fixed transaction costs. Many charities (unavoidably) get charged a fee for each deposit into their bank account. So two large donations create only two dollops of that fee, whereas 70 smaller donations attract 70 dollops. That fee might be $0.25 per transaction. So if the $140 is given in two donations, less than 1 percent of the two donations gets lost in transit between the donor and the charity; if the $140 is given in 70 donations, 12.5 percent gets lost in transit; and if $140 were given in 140 donations of $1, fully 25 percent would fail to reach the charity. Of course, if you gave 1400 donations of only $0.25 each, nothing would reach the charity at all.
The pattern persists even if you’re giving a lot. To get money from philanthropic foundations, charities typically have to apply and then later report on what they then do with the money. This work creates another type of transaction cost. Research by the U.S. Center for Effective Philanthropy shows that these transaction costs are much higher if the foundation makes several small grants than if it makes a few large ones of the same total value:
|Median time which charities spend applying & reporting on a grant of:||Median amount raised per hour spent||No. hours work in raising & managing $100,000|
|$10,000||12 hours||$833 /hour||120 (three weeks)|
|$100,000||27 hours||$3,704 /hour||27 (less than four days)|
So when you’re choosing charities to support this Christmas, divide your total giving between fewer charities, whatever the scale of your giving.
Phil Buchanan is CEO of the Center for Effective Philanthropy, a board of which includes Caroline Fiennes.