Coordination Failures, Philanthropy, and Public Policy

Abstract

We focus on an “equilibrium analysis” of coordination problems in giving that lead to multiple equilibria; the notion of strategic complements and substitutes turns out to be useful in this regard. Some societies can get stuck at a low level of giving while others might, by accident or policy, be able to coordinate on a higher level of giving. Ceteris-paribus, this furnishes one plausible reason for heterogeneity in philanthropy. We give conditions under which tax exemptions to private giving can have perverse effects by reducing equilibrium private giving. Direct government grants to charity, possibly temporary, can enable an economy stuck at an equilibrium with a low level of giving to attain an equilibrium with a high level of giving. Therefore, direct government grants can crowd-in private giving to charity. The paper contributes to the economics of philanthropy as well as to an understanding of the role of public policy in the face of private coordination failures.multiple equilibria; crowding-in; strategic substitutes and complements; tax deductibility of charitable contributions; direct grants; charitable redistribution; voluntary contributions to public goods