Monday, November 28, 2011

Insanely Successful Auctions

In an interesting post, Xan asks, "Why are charity auctions insanely successful?" His post brings up several interesting reasons related to auction theory regarding why charities would stand to benefit from holding auctions. One possibility that isn't discussed in the post or the comments is that charities are an outlet for in-kind giving -- the giving of products / services rather than cash. Auctions provide an efficient mechanism for converting these in-kind gifts into something that can be spent.

If the goal is to transfer resources to the charity, one might question why charities go through the hassle of hosting an auction. On the buyer side, Xan suggests how the charity can extract greater than fair value from the product. That is, if auctions are insanely successful, there is good reason to host them rather than devoting effort to other fundraising activities. On the seller side, the charity can capitalize on in-kind gifts from local businesses, but then, we still need to resolve why businesses resort to giving in kind.

A couple of reasons spring to mind: (1) Donating a product to an auction could be an effective form of advertising (to the extent that the auction is public or the winning bidder spreads the word to friends) and (2) in-kind gifts might have tax benefits over cash gifts. For example, if a local spa owner donates a spa day that retails for $200, the deduction is $200 (which as I understand it, would be the fair market value of the donation; correct me if I'm wrong), but it may realistically cost the spa owner $60 in foregone business (or other resources) even if the product is legitimately valued at $200. In this case, it makes sense to donate in-kind rather than spend the equivalent amount of cash.

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