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Serving the many or serving the most needy?

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  • Christoph Starke

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    Abstract

    Free, subsidized, or cost-covering? The decision on how much to charge for a good or service is fundamental in social business planning. The higher the fee paid by the recipient, the more people in need can be served by the additional revenues. However, charging a fee simultaneously excludes the very poor from consumption. This paper argues that the entrepreneur’s trade-off between both effects is governed by her level of poverty aversion, i.e., her preference intensity for the service of needy people with different incomes. Additionally, we account for the possibility of excess demand for the provided good and assume that applicants are rationed by non-price-allocation mechanisms. We therefore contribute to the extensive literature on the pricing and rationing behavior of nonprofit firms. Within our theoretical model, we find ambiguous reactions of the entrepreneur to a cut in donations. Given a sufficiently low level of status-quo donations, entrepreneurs with relatively high poverty aversion tend to increase the project volume, whereas those with relatively low poverty aversion do the opposite. Copyright Springer-Verlag Berlin Heidelberg 2012

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    Bibliographic Info

    Article provided by Springer in its journal Economics of Governance.

    Volume (Year): 13 (2012)
    Issue (Month): 4 (December)
    Pages: 365-386

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    Handle: RePEc:spr:ecogov:v:13:y:2012:i:4:p:365-386

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    Related research

    Keywords: Allocation mechanism; Donation; Nonprofit; Poverty aversion; Social entrepreneur; User fee;

    References

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    1. Fisher, Franklin M, 1977. "On Donor Sovereignty and United Charities," American Economic Review, American Economic Association, vol. 67(4), pages 632-38, September.
    2. Jerald SCHIFF & Burton WEISBROD, 1991. "Competition Between For-Profit And Nonprofit Organizations In Commercial Markets," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 62(4), pages 619-640, October.
    3. John A. List & David Lucking-Reiley, 2002. "The Effects of Seed Money and Refunds on Charitable Giving: Experimental Evidence from a University Capital Campaign," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(1), pages 215-233, February.
    4. Nichols, D & Smolensky, E & Tideman, T N, 1971. "Discrimination by Waiting Time in Merit Goods," American Economic Review, American Economic Association, vol. 61(3), pages 312-23, June.
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    7. Glazer, Amihai & Niskanen, Esko, 1992. "Why voters may prefer congested public clubs," University of California Transportation Center, Working Papers qt16j5s39d, University of California Transportation Center.
    8. Rose-Ackerman, Susan, 1987. "Ideals versus Dollars: Donors, Charity Managers, and Government Grants," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(4), pages 810-23, August.
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    11. Richard Steinberg, 1986. "The Revealed Objective Functions of Nonprofit Firms," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 508-526, Winter.
    12. Arthur C. Brooks, 2005. "What do nonprofit organizations seek? (And why should policymakers care?)," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 24(3), pages 543-558.
    13. Sah, Raaj Kumar, 1987. "Queues, Rations, and Market: Comparisons of Outcomes for the Poor and the Rich," American Economic Review, American Economic Association, vol. 77(1), pages 69-77, March.
    14. Kulshreshtha, Praveen, 2007. "An efficiency and welfare classification of rationing by waiting in the presence of bribery," Journal of Development Economics, Elsevier, vol. 83(2), pages 530-548, July.
    15. Andreoni,J., 2002. "Leadership giving in charitable fund-raising," Working papers, Wisconsin Madison - Social Systems 13, Wisconsin Madison - Social Systems.
    16. C. Du Bois & R. Caers & M. Jegers & C. Schepers & S. De Gieter & R. Pepermans, 2004. "Agency problems and unrelated business income of non-profit organizations: an empirical analysis," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 36(20), pages 2317-2326.
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    Cited by:
    1. Christoph Starke & Steffen Burchhardt, 2014. "Revealing the Preferences of Social Financiers," FEMM Working Papers 140002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

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