CHARITY WITHOUT ALTRUISM

Abstract

I. INTRODUCTION Evidence suggests that many charitable contributions are channeled to organizations (or groups of people) that produce excludable goods (or services) that are sold on the market. Some of the frequently noted examples are in the field of performing arts, where the philanthropic contributions of individuals and institutions constitute a traditional source of financing for the performers' regular activities. Organizations like orchestras, theaters, dance, and opera companies treat these donations as a stable stream of revenue and not as temporary funding or as a form of emergency relief resulting from an unexpected event.(1) For many of these nonprofit organizations, it is common practice to show in their financial statements a between the cost of producing their output and the revenue generated from its sale. This income gap is traditionally bridged by the flow of philanthropic contributions.(2) In the market setting, a philanthropic contribution is defined as a voluntary payment made by a consumer to the organization that produces the good. This payment is additional to the market price paid by the consumer to purchase the good or service. Two questions motivated this paper. 1. On the contributor side: Why would a selfish utility-maximizing contributor pay the producer of a good an amount (as contribution) exceeding the minimum price he has to pay to buy the product?(3) 2. On the recipient side: Why would a producer (the group of recipients) prefer to use the philanthropic contribution mechanism rather than the simple market mechanism of adjusting prices and quantities in order to break even and avoid the dependency on voluntary contributions? In the literature, the answer to the first question is founded on the altruistic motive of donors. Two general forms of altruistic donations are widely discussed. The first form is contributions made for the production of a nonexcludable pure public good, as discussed by Andreoni [1988] Bergstrom et al. [1986] and Roberts [1987]. In general, this literature suggests that, due to free ridership problems, voluntary contributions cannot by themselves support Pareto-efficient provision of the public good.(4) The second form of altruistic donation is represented by Hansmann [1981], James and Rose-Ackerman [1986], Ben-Ner [1986], and others. They consider contributions made to producers of excludable public goods. In Hansmann [1981] and Ben-Ner [1986], the contributing activity is described as self-imposed price discrimination. Implicitly they argue that club goods have a special feature such that consumers, in particular charitable contributors, are willing to give away parts of their consumer surplus of that product. In this setting, again, contributions are motivated by altruism, as the contributors do not bargain for benefits in return for their loss of consumer surplus. This explanation implies that donors have a special utility function and that they derive utility from the action of contributing, whereas other people, the recipients in particular, do not share this characteristic. The second question regarding producers' motives has received much less attention in the literature. The Coase theorem suggests the basic answer to both the above questions. The Coase theorem claims that when there are inefficiencies, the transition to an efficient allocation could generate economic rents.(5) Thus, utility-maximizing economic agents would negotiate their way towards the efficient allocation and share the rents created in the process. It is the contention of this paper that giving and receiving charitable contributions in a market setting is an example of that phenomenon. Charitable giving facilitates the move from an otherwise inefficient allocation to an efficient one. In the process, the participating agents (the contributors and the recipients) try to divert the rents created to their private benefit. This paper differs from the aforementioned literature in considering a non-altruistic motive for contributing. …