In economics, altruism is traditionally taught as an exception to the rational traits of the Economic Man, homo economicus. And while altruism rarely receives a tribute in the textbooks because of its apparent non-belonging in classic economics, it has strikingly important implications for public economic policy.
I have previously discussed the topic of nonprofits and the effects of changes in fundraising on charitable individuals. This week, I want to delve into a discussion of the phenomenon of ‘crowding-out’, community diversity, and touch on the differentiation of altruism between ‘pure’ and ‘impure’.
What is pure altruism, you ask? In theory, pure altruists are primarily concerned about the provision of a public good, and are happy to donate insofar as this need is not otherwise being met. This means that once a charity or nonprofit receives a generous government grant, the pure altruist will cut off private donations. After all, rationally speaking there is no difference between giving directly (through private donation) and indirectly (through taxation).
This substitution of private by public goods provision is known as ‘crowding out’. In a perfectly rational, purely altruistic community, government grants crowding out private donation would happen at a dollar for dollar ratio. Any increase in endowed income, or reduced taxation would result in pure altruists injecting that extra dollar of disposable income into public goods.
This isn’t necessarily beneficial though: crowding out can pose a significant hidden cost for governments if net public good provision remains unchanged.
But as it stands, crowding out almost always occurs at a rate of substitution less than dollar for dollar. Why? Well, perhaps unsurprisingly, it is dubious that homo economicus exists in large numbers in any community or even serves as a practical guide for us when making charitable contributions. It is much more likely that the majority of us practice ‘impure altruism’. But don’t be alarmed by the suggestion of immoral deficiency – ‘impure altruism’ simply offers an explanation behind why an individual might keep giving even when it makes no altruistic sense (of the pure kind) to do so.
Put simply, impure altruism is motivated by the sheer value of personal giving, also called the ‘warm glow’ incentive. Complete crowding out by government grants may be alleviated by these warm, glowing instincts in the donor population.
Although the ‘warm glow’ model of donation is widely accepted by public economists, the lesser-known theory of ‘cold glow’ giving has been advanced in the last five years. Its proponent Hungerman (2007) launches off findings that more diverse communities are less altruistic, to in turn explore the effects of government grants in ethnically heterogeneous populations.
There are two directions ‘cold glow’ giving could take:
(1) Diversity lowers purely altruistic activities.
When a community broadens its ethnic and social identity, preferences for social goods can become polarized, especially where public funds are concentrated on improving the living standards of racial minorities at the financial cost of the working or middle class white majority.
As individuals care less about the amount of public goods provided for everyone, on average we see communities that make fewer contributions to educational institutions, are less charitably generous, less favourable of income redistribution, less supportive of government, and less likely to volunteer and participate in community organisations.
It is important to point out that private donations are still beholden to impure altruistic ‘warm glow’ effects. Though these communities are likely to have lowest levels of public goods, individuals in these communities still accrue personal benefit from donating privately. They will also be most receptive to government intervention later on.
(2) Diversity has a ‘cool off’ effect on ‘warm glow’ altruism.
On the other hand, if the ‘warm glow’ incentive to donate comes from increased philanthropic reputation or status, then the desire for social approval and prestige diminishes as diversity in one’s community increases. Government intervention is also likely to have limited positive effects.
What does this mean for an ethnically diverse nation such as Australia? Hungerman’s study would suggest that as our multicultural identity expands, altruism will either intensify or die off, depending on whether we begin as pure or impure altruists.
And after all this discussion of altruism, another question that begs serious thought is this: in real societies, where people face real imperatives other than perfect rationality such as altruism, does homo economius still hold any relevance for us?
- Andreoni J & Payne AA 2009, ‘Is Crowding Out Due Entirely to Fundraising? Evidence from a Panel of Charities’.
- Hungerman DM 2007, ‘Diversity and Crowd-out: A theory of cold-glow giving’, National Bureau of Economic Research, Cambridge.
- Payne AA 2009, ‘Does Government Funding Change Behaviour? An Empirical Analysis of Crowd-Out’, Tax Policy and the Economy Vol.23, University of Chicago Press.