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How donations to charity can increase business profits

Geoff Riley

26th August 2016

Firms can earn significantly higher profits when they tie sales of their products with a donation of 5% of their gross revenues to charity. That is the central finding of experimental research by Adriaan Soetevent, Te Bao and Anouk Schippers, presented at the annual congress of the European Economic Association in Geneva in August 2016.

Their study investigates whether there is a profit motive (alongside possible altruistic or reputational concerns) for why commercial firms offer charity-linked bundles. After all, such offers can be profitable if consumers’ willingness to pay for the product increases by more than the actual amount that is transferred to the charity.

The authors find that a donation of 5% of the sales price is the best of both worlds because it significantly increases a firm's profits and total donations to charity. A donation of an absolute amount (equivalent to 5%) has similar effects on sellers’ profits, but reduces consumers’ private donations by almost exactly the amount they donated by purchasing the product. A donation of 2% neither benefits the firm nor the charity.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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