Preference Variation and Private Donations

While economists have usually been reluctant to discuss the effects of preference differences, a large part of the recent theoretical literature on altruism and private donations has focused on the structure of individual utility functions. There is a simple reason for this unusual research interest. The traditional model, in which private donations are taken to be contributions for the voluntary provision of a pure public good, leads to extreme behavioural predictions. In this model there will be ‘one-for-one’ crowding-out, as an optimizing individual will perfectly substitute his or her own donations for donations from another source. Government intervention is ‘neutral’, because increases in government expenditure lead to equal decreases in individual contributions. Matters change, however, when one takes into account that people are not uniquely motivated by the outcome of their contribution. Models of ‘mixed’ or ‘impure’ altruism incorporate the idea that the valuation of the act of giving may be as important as the outcome of that act (that is, the valuation of the public good for which the donation is a contribution). In these models, the strong prediction of one-for-one crowding-out no longer holds.