Charitable Markets
A spate of recent news stories like this one have reported that many charities are worried that people are diverting gifts to Katrina/Rita relief funds from more traditional charitable causes. It seems to me that anything else would be a bizarre result.
Let’s suppose that an individual is planning to contribute $1000 to charity this year. He usually splits his giving between his local church ($400), the local art museum ($300), and the American Cancer Society ($300). After Hurricanes Katrina & Rita, he ups his total donations to $1200, but reallocates to church ($300), art museum ($100), American Cancer Society ($200), and hurricane relief ($600).
The new demands on his charitable impulses increase his total giving, but also produce a changed distribution.
Presumably the pre-hurricane distribution of his charity reflected his sense of the marginal value of the last dollar contributed to each charity. Adding hurricane relief would be expected to change that – the marginal value of the last dollar to hurricane relief should be the same as the marginal value to the other charities. Since contributions to hurricane relief were zero before the hurricane, we’d expect the first dollar contributed to have a high marginal value. It is not surprising, therefore, that the marginal value to hurricane relief of the last dollar of the amount by which our individual increased his total contributions is higher than the last dollar to which he gave to the other charities. After all, the increased contributions represent additional sacrifices the giver has made to enlarge his pool of charity and so there must be larger marginal value to the giver from those contributions than from the contributions he was previously making.
If this is correct, reallocation by contributors in the face of new information ought to be both an expected phenomenon and a one which maximizes welfare. Just as we think government ought to reallocate funds from low marginal value projects (e.g. the Alaskan “bridge to nowhere”), individuals ought to reallocate funds to the higher marginal value projects until the marginal value of the last dollar to each charity is equal. If it is a good thing, then we ought to tell charities facing a shortfall in giving as a result that the appropriate strategy is to find ways to ensure that donors reevaluate the marginal value of their contributions upward. (For example, they might cut their own administrative costs and so increase the percentage of giving that goes to the charitable purpose directly.)
Let’s suppose that an individual is planning to contribute $1000 to charity this year. He usually splits his giving between his local church ($400), the local art museum ($300), and the American Cancer Society ($300). After Hurricanes Katrina & Rita, he ups his total donations to $1200, but reallocates to church ($300), art museum ($100), American Cancer Society ($200), and hurricane relief ($600).
The new demands on his charitable impulses increase his total giving, but also produce a changed distribution.
Presumably the pre-hurricane distribution of his charity reflected his sense of the marginal value of the last dollar contributed to each charity. Adding hurricane relief would be expected to change that – the marginal value of the last dollar to hurricane relief should be the same as the marginal value to the other charities. Since contributions to hurricane relief were zero before the hurricane, we’d expect the first dollar contributed to have a high marginal value. It is not surprising, therefore, that the marginal value to hurricane relief of the last dollar of the amount by which our individual increased his total contributions is higher than the last dollar to which he gave to the other charities. After all, the increased contributions represent additional sacrifices the giver has made to enlarge his pool of charity and so there must be larger marginal value to the giver from those contributions than from the contributions he was previously making.
If this is correct, reallocation by contributors in the face of new information ought to be both an expected phenomenon and a one which maximizes welfare. Just as we think government ought to reallocate funds from low marginal value projects (e.g. the Alaskan “bridge to nowhere”), individuals ought to reallocate funds to the higher marginal value projects until the marginal value of the last dollar to each charity is equal. If it is a good thing, then we ought to tell charities facing a shortfall in giving as a result that the appropriate strategy is to find ways to ensure that donors reevaluate the marginal value of their contributions upward. (For example, they might cut their own administrative costs and so increase the percentage of giving that goes to the charitable purpose directly.)
Posted by Andy Morriss on
Saturday September 24, 2005 at 12:53pm