2 - LEC 2 - Charitable giving, altruism and warm glow

Question 1

Can private (charity) giving substitute for public (government) provision?
– If so, what might that imply for the provision (level of supply) of such goods if the government increased (decreased) its funding?

Answer 1

It depends on people’s motivation(s) for giving

Question 2

whats the equation for the benefits in ‘a desire to improve the general well-being of recipient’ (Becker 1974,)

Answer 2

Question 3

whats pure altruism

Answer 3

personal utility from the social benefit (i.e., from self and others ‘consuming’ the total supply of a public good)

Question 4

assumptions of pure altruism

Answer 4

– Donator concerned only with the total supply of social benefit
– That is, the absolute quantity of the public good (𝐺) provided

Question 5

consequences of pure altruism

Answer 5

– Giving by self and others (by donation or taxation) seen as
• Perfect substitutes → ‘complete’ crowding out
• Imperfect substitutes → ‘incomplete’ crowding out

Question 6

whats the pure altruism: complete crowding out hypothesis

Answer 6

– Overall provision (total supply) will not be affected by changes in government contributions (funded through lump-sum taxes)
– ‘A dollar from my pocket (tax) to the public good can be retrieved by reducing the contributions I voluntarily make to the public good by a dollar’

Question 7

what does the Complete ‘crowding-out’ hypothesis suggests if : • Current provision (public/private): £100k • Government increases funding by £50k
→ New supply £150k

Answer 7

– Individuals reduce their private donations by £50k – New supply: £100k
– No change in net supply

• Meanwhile...
– Pure altruism predictions are not consistent with charitable
giving behaviour
– Most people give
– Crowding-out is incomplete (5-35%)

Question 8

whats impure altruism

Answer 8

• Giving also motivated by interest in the private benefit from contributing (𝑔𝑖), even if donator cares about the social benefit (𝐺)
• Includes ‘warm glow’ (buzz from giving, feelings of duty, etc.)

Question 9

whats the equation for impure altruism: Benefit from giving viewed as a public good:

Answer 9

Question 10

if donations are driven by pure egoism or impure altruism, what does this matter?

Answer 10

• Pure egoism (‘good cause dump’):
– Donations (private provision) will not be sensitive to
changes in government contributions
– Private supply of the public good will not be affected
– Total supply will increase

• Impure altruism:
– Donations will be affected
– How much depends on the relative strength of each motive (altruism, egoism)
– Total supply will change

Question 11

compare pure warm glow and impure altruism in an example

Answer 11

Pure warm glow
• Current provision (public/private): £100k
• Government increases funding by £50k → New supply £150k
• Complete ‘warm glow’ hypothesis suggests:
– Individuals don’t reduce their private donations – New supply: £150k → Net change in supply

Impure altruism
• Current provision (public/private): £100k
• Government increases funding by £50k → New supply £150k
• Impure altruism hypothesis suggests:
– Individuals do not reduce private donations by the full £50k – New supply: £100k < £X < £150k → Net change in supply

Question 12

whats the Impure altruism predictions

Answer 12

– Incomplete crowding-out (following the ‘dollar from the
pocket’ tax, donation reduces by less than a dollar) – Giving predicted in a large economy
• Intuitively appealing
– Real world: increase in government giving decreases giving by donors by 5-35% of the increase (i.e., incomplete crowding-out)

Question 13

how did adreoni 1993 test out the crowding out hypothesis - ‘An experimental test of the public good crowding-out hypothesis’

Answer 13

– Subjects played in groups of 3 for 4 rounds, then re-
matched
– 20 rounds
– Two primary treatments (T1 and T2) (no tax payoffs and tax payoffs- 2 unit tax)

Predictions:
• Pure altruism (complete crowding out): With a forced contribution of 2, mean contributions drop by 2 in tax treatment

Results:
• Average contributions – No tax: 2.78
– Tax: 3.35 (includes lump-sum tax of 2 tokens)

• Interpretation
– Incomplete crowding out
– Subjects who are taxed give more than those who are not taxed
– Giving for others not a perfect substitute for giving by self
– Subjects are concerned about public benefits (quantity) and also their private benefits (‘warm glow’)

• Implications: Total supply of public good will fall but not fully in proportion to government decrease in contribution

Question 14

how did Eckel, Grossman & Johnston (2005, JPE): ‘An experimental test of the crowding out hypothesis’ test crowding out

Answer 14

DG with real charities

different framing - neutral and tax frame

• Results:
– Neutral → No crowding out
– Tax → Complete crowding out
• Great sensitivity to frame: no tax zero crowding out, tax complete crowding out (pure ‘warm glow’)

• Impure altruism predominates
• Results: robust to (external) ‘changing’ environments
• Weight on the private benefit component (warm glow) is small
• Experimental evidence: total supply will be affected by government reduction in funding (but not in a ‘like for like’ manner)
• Finding that government giving decreases giving by donors by 5‐35% of the increase is consistent with this and arises, as predicted, because of the interaction between the two motives.