The Habit of Giving

    Habit formation in consumption is thought to exert great influence on behavior, but there has been little research done on long-term habit forming. Many charitable organizations believe it is worthwhile to solicit very small donations because these gifts, particularly from young people, form a habit of giving which leads to larger donations in the future. However, merely observing that those who give often when young are more likely to be generous donors later in life is not evidence of habit formation. Using data on alumni contributions to a university, we assess whether there is habit formation true state dependence or whether spurious state dependence is generated by unobservable factors such as affinity to the school. Performance of the school's athletic teams and solicitation by one's former roommates are used as instrumental variables that generate shocks to giving while young. There is strong evidence of habit formation, namely, that giving regularly is important, irrespective of amount. This finding has important implications for fundraising strategies, charities' accounting practices, and tax policy, as well as models of behavior.