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Target-Group and Quality Decisions of Inequity-Averse Entrepreneurs

Author

Listed:
  • Steffen Burchhardt

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

  • Christoph Starke

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

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.

Suggested Citation

  • Steffen Burchhardt & Christoph Starke, 2010. "Target-Group and Quality Decisions of Inequity-Averse Entrepreneurs," FEMM Working Papers 100011, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  • Handle: RePEc:mag:wpaper:100011
    as

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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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    References listed on IDEAS

    as
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    5. 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 810-823, August.
    6. 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.
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    8. 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 979-984, September.
    9. Dirk Engelmann & Martin Strobel, 2004. "Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments," American Economic Review, American Economic Association, vol. 94(4), pages 857-869, September.
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    11. 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.
    12. 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.
    13. Richard Steinberg & Burton A. Weisbrod, "undated". "Pricing and Rationing by Nonprofit Organizations with Distributional Objectives," IPR working papers 97-28, Institute for Policy Resarch at Northwestern University.
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    More about this item

    Keywords

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

    JEL classification:

    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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