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Charitable Giving and Optimal Public Policy in a Competitive Equilibrium with Multiple Equilibria

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  • Sanjit Dhami
  • Ali al-Nowaihi

Abstract

In a competitive-equilibrium analysis of giving to charity, we show that strategic complementarity between individual giving and aggregate giving can lead to multiple equilibria. This provides a possible explanation for observed heterogeneity in giving. It is possible, but not necessary, that at a low equilibrium in giving (LE), an increase in subsidy reduces giving (perverse comparative statics) while at a high equilibrium (HE) the comparative statics are normal (subsidies promote giving). The perverse comparative statics at LE preclude using subsidies to move the economy to HE. We show how temporary direct government grants can engineer a permanent move from LE to HE. Once HE is established, the optimal mix of private and public giving is determined using a welfare analysis. We show that the Nash non-cooperative outcome is virtually identical to the competitive-equilibrium, even for relatively small numbers of givers. The competitive-equilibrium approach is more tractable and plausible, and more general because it does not rely on a symmetric equilibrium. We also show how our results are applicable to redistributive and public good contexts.

Suggested Citation

  • Sanjit Dhami & Ali al-Nowaihi, 2010. "Charitable Giving and Optimal Public Policy in a Competitive Equilibrium with Multiple Equilibria," Discussion Papers in Economics 10/08, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:10/08
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp10-08.pdf
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    References listed on IDEAS

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    1. Jan Potters & Martin Sefton & Lise Vesterlund, 2007. "Leading-by-example and signaling in voluntary contribution games: an experimental study," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 169-182, October.
    2. Dean Karlan & John A. List, 2007. "Does Price Matter in Charitable Giving? Evidence from a Large-Scale Natural Field Experiment," American Economic Review, American Economic Association, vol. 97(5), pages 1774-1793, December.
    3. List, John A. & Rasul, Imran, 2011. "Field Experiments in Labor Economics," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 2, pages 103-228, Elsevier.
    4. Thomas Garrett & Russell Rhine, 2010. "Government growth and private contributions to charity," Public Choice, Springer, vol. 143(1), pages 103-120, April.
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    Cited by:

    1. Enrique Fatas & Joo Young Jeon & Paloma Ubeda, 2019. "An Experimental Investigation of Charity Rebates," Economics Discussion Papers em-dp2019-12, Department of Economics, University of Reading.

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    More about this item

    Keywords

    Multiple Equilibria; Aggregate Strategic Substitutes and Complements; Competitive and Non-cooperative Equilibria; Direct Grants; Charitable Redistribution; Voluntary Contributions to Public Goods; Optimal Mix of Public and Private Giving.;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods

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