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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.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 10/08.

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Date of creation: Mar 2010
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Handle: RePEc:lec:leecon:10/08

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Related research

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.;

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  1. Dean Karlan & John List, 2006. "Does price matter in charitable giving? Evidence from a large-scale natural field experiment," Natural Field Experiments 00279, The Field Experiments Website.
  2. Jan Potters & Martin Sefton & Lise Vesterlund, 2007. "Leading-by-example and signaling in voluntary contribution games: an experimental study," Economic Theory, Springer, vol. 33(1), pages 169-182, October.
  3. 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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