Charity Fraud: An Experimental Study of the Moral Hazard Problem in the Charity Market

Hiroki Kato and Youngrok Kim

No HIAS-E-139, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: Donors entrust their resources to charitable organizations, which use these to carry out activities that contribute to society. Thus, the donation market carries the potential for moral hazard on the part of charitable organizations. However, empirical insights into the negative consequences of this problem are scarce. This study creates a unique game by incorporating elements of principal-agent relationships into the dictator game, in order to quantitatively examine the consequences of moral hazard in the donation market through laboratory experiments. The results reveal that moral-hazard environments hinder the average donation amount from donors and, furthermore, decrease recipients’ average payoffs. To address this negative outcome, non-binding promises are introduced to inform donors beforehand of the actions to be taken by charitable organizations. Although these promises succeed in offsetting the decrease in donation amounts, they do not sufficiently improve recipient welfare.

Keywords: Charity market; Dictator game; Fraud; Hidden action; Promise (search for similar items in EconPapers)
JEL-codes: C71 C92 D64 D82 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2024-04-02
New Economics Papers: this item is included in nep-exp and nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-139

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