Donors talk: the signaling and imprinting effects of giving to social enterprises

How should donors fund microfinance enterprises and maximize social impact? Should they spread contributions across organizations or concentrate them? We address this thorny issue by assessing separately how the act of giving a donation and the amount donated affect the social performance of MFOs worldwide. Drawing on signaling theory, we hypothesize that the act of giving has a more significant impact on social performance than the actual amount donated. Moreover, we show an imprinting effect on social performance that persists even when donations dry up. That is, the enhanced social performance observed during subsidized periods is not reversed during subsequent unsubsidized periods. The persistence of subsidy-linked social performance suggests that designing smart-subsidy strategies is appropriate for the microfinance industry in order to maximize social benefits while keeping market distortions under control. Further, the global social impact of diversified donor contributions across many organizations may be greater than that of concentrated funding in a few.