Episode 47: Navigating the Notches

An increase from 3 to 4 stars on Charity Navigator can be associated with a 6% rise in contributions. For smaller charities, the impact can be as much as 11%. That’s not too surprising but what about when ratings drop? According to new research, there’s no impact on contributions.

“There seems to be this asymmetric effect,” said Jennifer Mayo, a Ph.D. student at the University of Michigan and author of Navigating the Notches.Charity Responses to Ratings. Some charities respond to incentives by changing behavior to try to get themselves above the star thresholds, which leads to “bunching.” Mayo explains more about that and what fields that’s more likely to occur during this episode of Fresh Research. “You always see this tradeoff between how much you want to incentive the organization or person to improve their score versus how many people are facing that incentive,” she said.

A notched rating system like Charity Navigator’s four stars, induces more behavioral change than a continuous measure, like its new Encompass Rating System, which affects a smaller number of charities. About 9,000 nonprofits are included in Charity Navigator’s four-star rating system. Last year, the organization began to roll out its new Encompass Rating System, based on four beacons. About 60% of that rating – which is on a 100 scale – is based on the impact and results beacon.

“It came through to us as a data point for helping us with the evaluation and unification of those rating systems,” said Kevin Scally, chief relationship officer. “The notched system does have benefits to nonprofits as well as users.

“Her analysis of the notched system, particularly the bunching, is really going to help us inform how we can incentive performance of the nonprofits,” Laura Andes, vice president of impact ratings for Charity Navigator, said.“She gave us clues on how we can more effectively do that as we move forward. Who is most incentivized, and it’s not everyone; some sectors more than others.”

Some 80% of donations through Charity Navigator’s Giving Basket go to organizations with 3 and 4 stars, according to Scally.