A fundraising mechanism inspired by historical tontines: Theory and experimental evidence

The tontine, which is an interesting mixture of group annuity, group life insurance, and lottery, has a peculiar place in economic history. In the seventeenth and eighteenth centuries it played a major role in raising funds to finance public goods in Europe, but today it is rarely encountered outside of a dusty footnote in actuarial course notes or as a means to thicken the plot of a murder mystery. This study provides a formal model of individual contribution decisions under a modern variant of the historical tontine mechanism that is easily implemented by private charities. Our model incorporates desirable properties of the historical tontine to develop a mechanism to fund the private provision of a public good. The tontine-like mechanism we derive is predicted to outperform not only the voluntary contribution mechanism but also another widely used mechanism: charitable lotteries. Our experimental test of the instrument provides some evidence of the beneficial effects associated with implementing tontine-like schemes. We find that the mechanism has particular power in cases where agents are risk-averse or in situations where substantial asymmetries characterize individual preferences for the public good.

[1]  Catherine C. Eckel,et al.  Rebates Versus Matching: Does How We Subsidize Charitable Contributions Matter? , 2003 .

[2]  J. Andreoni.  IMPURE ALTRUISM AND DONATIONS TO PUBLIC GOODS: A THEORY OF WARM-GLOW GIVING* , 1990 .

[3]  T. Bergstrom,et al.  Do government subsidies increase the private supply of public goods? , 1996 .

[4]  Mark A Walker,et al.  A Simple Incentive Compatible Scheme for Attaining Lindahl Allocations , 1981 .

[5]  H. Varian,et al.  On the private provision of public goods , 1986 .

[6]  D. Weir.  Tontines, Public Finance, and Revolution in France and England, 1688–1789 , 1989, The Journal of Economic History.

[7]  T. Groves,et al.  Optimal Allocation of Public Goods: A Solution to the 'Free Rider Problem' , 1977 .

[8]  Urs Fischbacher,et al.  z-Tree - Zurich toolbox for readymade economic experiments: experimenter's manual , 1999 .

[9]  Adrian. Sargeant,et al.  Benchmarking Charity Performance: Returns from Direct Marketing in Fundraising , 2006 .

[10]  John Morgan,et al.  Financing Public Goods by Means of Lotteries , 2000 .

[11]  J. Falkinger,et al.  Efficient private provision of public goods by rewarding deviations from average , 1996 .

[12]  R. Sugden.  On the Economics of Philanthropy: Reply , 1983 .

[13]  John Morgan,et al.  Funding Public Goods with Lotteries: Experimental Evidence , 2000 .

[14]  Robert Sugden,et al.  Reciprocity: The Supply of Public Goods Through Voluntary Contributions , 1984 .

[15]  Stefan Hauptmann.  Empirical Research in Evolutionary Economics: The Potential of the Social World Perspective , 2004 .

[16]  J. Andreoni.  Toward a Theory of Charitable Fundraising , 1998 .

[17]  D. J. Dale.  Charitable Lottery Structure and Fund Raising: Theory and Evidence , 2004 .

[18]  H. Varian.  Sequential contributions to public goods , 1994 .

[19]  Michael McKee,et al.  Voluntary Contribution Games: Efficient Private Provision of Public Goods , 1991 .

[20]  John L. Turner,et al.  How (Not) to Raise Money , 2005, Journal of Political Economy.

[21]  John A. List,et al.  Using Lotteries to Finance Public Goods: Theory and Experimental Evidence , 2007 .

[22]  R. Ransom,et al.  Tontine Insurance and the Armstrong Investigation: A Case of Stifled Innovation, 1868–1905 , 1987, The Journal of Economic History.

[23]  Charles A. Holt,et al.  Risk Aversion and Incentive Effects , 2002 .

[24]  David Lucking-Reiley,et al.  The Effects of Seed Money and Refunds on Charitable Giving: Experimental Evidence from a University Capital Campaign , 2002, Journal of Political Economy.