Bluffing in Charitable Giving – An Experiment on Indirect Signalling

Abstract

People often care about how they are perceived by others, and this motivates many individuals to act in a way that sends a favourable signal about their character. In this paper, we introduce a decomposition of signalling into its direct and indirect components. Behaviour can influence a person’s image directly, and it can influence a person’s image indirectly by changing people’s beliefs about important, unobserved behaviours. We show in an experiment on charitable giving that this distinction is necessary for understanding signalling behaviour. Many donors engage in wasteful signalling with actions that are in themselves unimportant for the donors’ image (the number of charities they give to), but only if this action changes beliefs about important, unobserved behaviour (how much they donate). Understanding the two components of signalling is key for designing organisations to avoid strategic and wasteful signalling.