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Competitive Charitable Giving and Optimal Public Policy with Multiple Equilibria

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  • Sanjit Dhami
  • Ali al-Nowaihi

Abstract

Consider a large number of small individuals contributing to a charity or to a public good. We study the properties of a competitive equilibrium in giving and allow for multiple equilibria. Our proposed condition, aggregate strategic complementarity, is a necessary condition for multiple equilibria. Consider two equilibria with low (L) and high (H) levels of giving. Comparative statics at L could be perverse (subsidies reduce giving) while those at H could be normal (subsidies induce giving), which rules out the use of incentives at L. We demonstrate how public policy, in the form of temporary direct government grants to charity can engineer a move from L to H. We use a welfare analysis to determine the optimal mix of private and public contributions to charity. Our paper contributes to the broader and more fundamental question of using public policy to engineer moves between multiple equilibria.

Suggested Citation

  • Sanjit Dhami & Ali al-Nowaihi, 2011. "Competitive Charitable Giving and Optimal Public Policy with Multiple Equilibria," Discussion Papers in Economics 11/37, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:11/37
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    References listed on IDEAS

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    More about this item

    Keywords

    Multiple equilibria; privately supplied public goods; aggregate strategic substitutes and complements; competitive and non-cooperative equilibria; direct grants; charitable redistribution; voluntary contributions to public goods; optimal mix of public and private giving.;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods

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