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Target-Group and Quality Decisions of Inequity-Averse Entrepreneurs

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  • Steffen Burchhardt

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

  • Christoph Starke

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

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    Abstract

    Limited donations force nonprofit entrepreneurs to ration needy individuals by deciding on who is served at what quality level. We propose a positive model of this allocation for applicants with differing incomes under the assumption of perfect user-fee discrimination. By following recent experimental economic research on social preferences, we assume that entrepreneurs behave inequity averse, i.e. they care about the relative consumption possibilities of others. We find that less inequity-averse entrepreneurs prefer to serve wealthier individuals at high reference quality. In contrast, more inequity-averse entrepreneurs care for the poorest individuals but offer minimum quality. Furthermore, as input costs increase, entrepreneurs with low inequity aversion change the target group, while entrepreneurs with high aversion do not.

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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2010_Dateien/2010_11.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 100011.

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    Length: 22 pages
    Date of creation: Apr 2010
    Date of revision:
    Handle: RePEc:mag:wpaper:100011

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    Keywords: inequity aversion; nonprofit; quality; rationing; social entrepreneur; user fees;

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    1. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
    2. Richard Steinberg & Burton A. Weisbrod, . "Pricing and Rationing by Nonprofit Organizations with Distributional Objectives," IPR working papers 97-28, Institute for Policy Resarch at Northwestern University.
    3. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    4. Besley, Timothy & Coate, Stephen, 1991. "Public Provision of Private Goods and the Redistribution of Income," American Economic Review, American Economic Association, vol. 81(4), pages 979-84, September.
    5. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
    6. Engelmann,Dirk & Strobel,Martin, 2002. "Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments," Research Memorandum 015, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    7. David M. Blau & H. Naci Mocan, 1999. "The Supply of Quality in Child Care Centers," NBER Working Papers 7225, National Bureau of Economic Research, Inc.
    8. Glazer, Amihai & Niskanen, Esko, 1992. "Why Voters May Prefer Congested Public Clubs," University of California Transportation Center, Working Papers qt9vk9r6zm, University of California Transportation Center.
    9. Rose-Ackerman, Susan, 1987. "Ideals versus Dollars: Donors, Charity Managers, and Government Grants," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 810-23, August.
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    11. Bourguignon, F. & Fields, G.S., 1990. "Poverty Measures and Anti-Poverty Policy," DELTA Working Papers 90-04, DELTA (Ecole normale supérieure).
    12. Steinberg, Richard & Weisbrod, Burton A., 2005. "Nonprofits with distributional objectives: price discrimination and corner solutions," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2205-2230, December.
    13. Dan Friesner & Robert Rosenman, 2004. "Non-profit cost-adjusting with quality as a private good," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 511-523.
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