Coordinating Donations Via an Intermediary: the Destructive Effect of a Sunk Overhead Cost

Donors often use the services of an intermediary to prevent their donations from being too thinly distributed over multiple public projects. We explore whether donors’ willingness to coordinate their funds via an intermediary depends on the extent of the intermediary’s discretion over their contributions, as well as the organizational overhead costs incurred by the intermediary. We investigate this using a laboratory experiment in which donors face multiple identical threshold public goods and the opportunity to coordinate their contributions via another donor assigned to the role of intermediary. In line with standard game theoretic predictions, we find that donors make use of the intermediary only when they know she is heavily restricted in terms of the proportion of their contributions she can expropriate for herself. However, we find strong evidence that the positive effect of these restrictions is undone once the intermediary incurs a sunk overhead cost. Our analysis suggests that the ex-ante inequality created as a result of this sunk cost reduces the trustworthiness of the intermediary in the donors’ eyes, which in turn reduces the donors’ willingness to use the intermediary to coordinate their contributions effectively.