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Serving the Many or Serving the Most Needy?

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  • Christoph Starke

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    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

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    Abstract

    For 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. But charging a fee means simultaneously to exclude 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 thereby contribute to the extensive literature on the pricing and rationing behaviour 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, while those with relatively low poverty aversion do the opposite.

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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2010_Dateien/2010_02.pdf
    File Function: First version, 2010
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    Bibliographic Info

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100002.

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    Length: 27 pages
    Date of creation: Jan 2010
    Date of revision:
    Handle: RePEc:mag:wpaper:100002

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    Keywords: allocation mechanism; donation; nonprofit; poverty aversion; social entrepreneur; user fee;

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    16. James Andreoni, 2006. "Leadership Giving in Charitable Fund-Raising," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 1-22, 01.
    17. 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.
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    19. 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.
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