Wasteful 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. An observed behaviour can influence a person’s image directly when the behaviour itself is image-relevant, and it can influence a person’s image indirectly by changing people’s beliefs about an unobserved, image-relevant behaviour. In an experiment on charitable giving, donors decide on (i) what charities to donate to, and (ii) how much to donate. We vary which of the donors’ decisions are observed by a third-party. We find that individuals engage in wasteful, indirect signalling. They engage in a behaviour that in itself is not image-relevant (donating to many charities), but only if doing so can change observers’ beliefs about an unobserved, image-relevant behaviour (donating large amounts). Avoiding wasteful signalling is key to designing effective institutions, and decision-makers therefore need to consider the two components of signalling.