Cross-Industry Review of the Profitability of Philanthropic Donations

By Leopold Brown @ 2024-12-09T17:24 (+8)

Context

The student club TEA at University of Arizona has done Writing to Learn projects (based on Holden Karnofsky’s “Writing by Learning”) for interested students who have already completed the introductory fellowship. Writing to Learn is meant to allow students to dive deeper into topics within effective altruism, philosophy, and the many different cause areas through an iterative process of writing, critiquing, and researching. For context, I’m a TEA organizer and Math/Econ undergraduate senior; this was my writing to learn project.

The project was completed a few semesters ago and I’m (embarrassingly) only now getting around to this post. Apparently this forum-procrastination is fairly common among my friends; So, this is your sign to make that post you wanted to do months ago. 

Preface

Initially curious about getting more donations out of the private sector, I tried to find natural competitive advantages for firms who donate profits. I formulated a bunch of questions (appendix), and settled on analyzing profitability of firm donations across different industry sectors.

Partially to preserve authenticity and partially out of laziness, I've left it mostly as it was in my drive. This is a smaller version of a bigger potential investigation, and includes my thoughts, the writing to learn process, and a literature review. I had an applicable dataset to analyze and make quantitative conclusions, but other projects got in the way. 

If you’ve had similar questions on private sector philanthropy, hopefully this can save you the rabbit hole. If you haven’t, hopefully you find it interesting.

Driving Question

The driving question is, “What are the competitive advantages of firms donating 100% of their profits to charity?”. This could take the form of some type of tax breaks, positive consumer discrimination (people buying your product because you are a “good company”), lower government regulations, etc. A full list of questions and consideration can be found in the appendix, as well as answers found through my exploration.

Process determining the questions 

I used a rough iterative process to narrow down my questions to a set of a few. I initially wrote out a long list of questions (most of which is in the appendix), picked the one that seemed the most promising/important. Then, I would have a long conversation with a fellow organizer about all the reasons why it might not be the most important question. I took what we talked about, researched our points, came up with a new most important question, and repeat. Eventually I narrowed it down to 3 important questions listed in the appendix, and settled on the one with a complementary dataset: “investigate which industries would show positive discrimination towards firms who participate in high levels of philanthropic donations”.

This project has been ruminating in my head for a while now, and Peter Singer’s article on the same topic supported profit donating as a competitive edge (although, only used a few chosen examples). After that inspiration, I had the idea that a firm donating profits to charity could experience a strong consumer preference. Companies such as Humanitix, Newman’s Own, and Patagonia (selling concert tickets, food goods, and outdoor gear, respectively) are very successful, in part due to people preferring them over competitors because they know their purchase is supporting a public good. This can provide them with either direct value if they use the public good (such as the environment), or a warm glow effect.

My excitement over this idea is based on simple economic theory: for any industry, tactic, competitive advantage, etc. you have a lot of people competing for profits. The competitive advantage of profit donating could be extremely strong, and yet nobody would be incentivized to donate 100% (or close to) their profits in order to gain this competitive advantage. However, for someone maximizing for total welfare (such as an effective altruist), donating 100% of profits to effective charities would be a very worthwhile endeavor. To that end, this may be a very productive career path as a form of earning to give.

Similar Efforts

Ambitious Impact (AIM) has a similar new effort that they have introduced, called Founding to Give. This is an earning-to-give style program that gives new entrepreneurs ideas and training, and the founders of the new potential firm pledge a certain percentage of their shares value upon exiting the company. This essentially operates as an assisted accelerator, which has several advantages; the firm can trade on the open market, they are unrestricted by ties to donations, the firm is unharmed when the shares are sold upon exit, etc. There are no strategic benefits for the firm as it operates like any other, but is unrestricted by industry choice and can target the most profitable ones. Naturally, in going after the most profitable prospects, they will face open-market competition from other existing firms or potential entrants. This operates like a very well-supported startup and is simply a very complicated expected value calculation to find the expected impact of these startups.

For a 100% profit donating firm, if there is a strong consumer preference “good” firms, then they may have a strong advantage over their competition. From my light research I have done, consumers are able to tell the difference between genuine, lasting philanthropic tendencies and the occasional project or donation from a firm (see literature review for more details). However, there may be problems with industry profitability, investment, singular ownership, and other considerations mentioned in AIM’s report and this Q&A article on the EA Forum. Presuming the positive discrimination effect is strong enough to put you ahead of regular competitors, the only true ‘competition’ you would face would be other firms in the industry offering a warm glow effect but performing less effective philanthropic donations. 

There is no significant research on whether or not people have different preferences between >10% profit donating firms and 100% profit donating firms, so a competing firm with less profit donating could still pose a threat, and may share a similar advantage if consumers cannot tell the difference. Firms donating to less effective charities would similarly have less impact while offering a warm glow effect. However, a competing firm donating 100% to effective charities would not actually be a competitor, as the profits are all going to the same place.

Literature Review

The question I am seeking to answer is: which industries have the highest consumer preference towards high donation companies?

The existing literature surrounding philanthropic giving is mainly relegated to CSR, or corporate social responsibility. This encompasses many things such as worker treatment, sustainable sourcing, philanthropic giving, etc. and serves to boost their reputation in the eyes of consumers. However, philanthropic giving is only one piece of CSR, and thus it would not be reasonable to extrapolate correlations between profit donating and profits based on data using CSR and profits.

Additionally, Barone et al. (2000) found that CRM (cause-related marketing) led people to give up price or functionality for a firm giving to charities. They investigated the price at which people would not be willing to buy a cause-supporting good, but did not show this difference across different goods, or between different amounts of profit donations. However, the results of CRM are maximized when the firm’s cause and products/services are related (such as Warby Parker giving glasses to those in need).

Amezcua et al. (2018) found that advertising specifically about a cause led to people accepting a 22% price premium among leading brands, and 10% for regular firms. This supports the hypothesis that people would pay a premium for such a firm, but does not differentiate between different industries in their analysis, and also is only analyzing low-profit donating firms.

Du et al. (2007) talks about solidifying consumer trust on the authenticity of such CSR efforts, but these are limited to analyzing the strategies of communication that companies use, and not differentiating firms based on industry. Because of this, I don’t think the information will be useful to answer my question. A large number of other papers investigate the effects of different amounts, strategies, and specific causes related to CSR (Liu et al. (2018), Coelho do Vale at al. (2020), Yu et al. (2021), Sharma et al. (2018))  but none do a review of positive effects of different philanthropic giving across industries.

Other research investigates across different industries, but is general in what CSR it is analyzing. Instead of philanthropic efforts, they broadly investigate CSR as mostly not philanthropic efforts, but instead upholding “socially responsible” business practices. Such research is such as Feldman and Smith (2004), Katsouras and McGraw (2010), and many of the previously mentioned studies.

Initial and Final Questions

As listed below in the appendix, I have a list of my initial questions, as well as the narrowed down list. A lot of these questions are still very valid and could be very important. Some were eliminated because they did not seem as personally interesting, or I did not have significant background knowledge for. There may be some very useful questions for other people to investigate, if interested.

Conspicuous Consumption

An adjacent topic I lightly investigated was conspicuous consumption, which was found to be related to high levels of CSR in luxury goods by Amatulli et al (2018). This relationship lacks significant supporting evidence, but could be very promising due to the high profit margins for such goods bought due to conspicuous consumption. I believe that a luxury good donating 100% profits towards effective charities and providing products that signal extreme wealth and altruism may have a niche in the market, if they have a reliable enough reputation.

Appendix

Initial Questions

This is a list of initial questions and considerations I had when exploring the broad question of “What are the competitive advantages of a 100% profit-donating firm?”. These are other questions that would be very useful to answer for others looking to explore this topic.

• Look into Amazon’s stint as a non-profit organization and see what advantages they garnered
• What different ways could they donate 100% of their profits? And, which of these would register them as non-profit organizations?
  • Through exploring the Profit for Good Q&A, the current way is to be wholly owned by an effective charity.
• What tax breaks would they get as a 100% profit donating company?
• How would a firm being 100% profit donating change consumer demand for their products?
• Is there a strong social “altruism signaling” that could occur from purchasing from a 100% profit donating firm, especially in high-end luxury goods?
• Are these competitive advantages enough to outweigh the challenges/uncertainties in creating a new business/company in a particular industry?.
• Can 100% profit donating firms break into areas that have other barriers to entry or subsidies from the government?
  • Would we even want to take money from the government?
• Would the good reputation of a 100% profit donating company protect it from internal rivalry? For example, Walmart may suffer defamation if they do predatory pricing against such a “good” firm.
• Would this help the principle-agent problem by giving employees extra incentives to work hard (because their work directly implies impact).
• Can consumers tell the difference between low, medium, and high levels of philanthropic giving of a firm? This would come into play in an industry where philanthropic giving is frequent.
• Could a B2B 100% profit donating firm also work, charging a premium in order to give their buyer a publicity boost?
• Can consumers tell the difference between high and low impact charities that a firm may be donating to?
  • Likely not, as people cannot usually differentiate between them when it comes to donations on their own.
• How does this compare to AIM’s Founding to Give, where they are just attempting to make a lot of profits?
• Are there existing companies that could be coerced into starting or increasing their profit donating? This could be by inherent incentives (tax write-offs), campaigning, hostile takeover, or convincing leadership/shareholders.
• For existing companies that donate to charities, could they be persuaded to donate to more effective charities?
• How would this impact culture / intangible aspects of the company? Would this strongly benefit this aspect of the company?
• Would “donating” through these purchases decrease consumer’s other forms of donation?
• Could a 3rd party regulating firm “rate” different CSR initiatives (similar to GiveWell or GWWC) and create incentives for effective CSR interventions?