What_Determines_Altruism

(a) What determines the extent of charitable giving among a population of altruists' Altruism or altruistic behaviour refers to the idea that people care about the wellbeing or welfare of other people in society, and that they are prepared to act in order to help them. The term derives from the work of Auguste Comte in the 19th Century, and has since been studied in great depth by a number of notable economists who have sought to explain why and how people make charitable donations in the name of altruism in order to help others. A 1990 US independent sector study found that the act of charitable giving is widespread in the United States, with almost 70 percent of all households making contributions of money and property, which in total exceed 1 percent of GDP. We can see from these statistics that US citizens donate considerable amounts of money. The question that economists often ask is what motivates the decision to make these donations, and furthermore what determines the extent of charitable giving by these people' In order to answer this question we must first of all examine the different models as to why people choose to make charitable donations, and then consider the implications of these models. Perhaps the most simple and easy to understand model of altruism is the public-good model. The thought behind this model is that the individual gives to charity because he or she cares about the welfare and wellbeing of others in society. Consider a simple example with two individuals in which individual A is a rich person and an altruist, and where individual B is poor. In this instance the idea of public-good altruism is that individual A cares about individual B’s welfare and general consumption and will make a donation to individual B to help. Indeed, such is his caring that individual B’s consumption forms part of individual A’s utility function which can therefore be seen to offer positive externality spillover effects. However, it is important to note that these donations in the public good model of altruism are seen to exhibit pure public good properties in that donations are both non-rival and non-excludable. Furthermore, donations in this model are seen to be perfect substitutes for one another. The upshot of both of these factors is that individual altruists are able to free-ride on the donations made by other altruists. Indeed, it is in their interest to do so. Altruists in this model are not concerned about who or where the donation comes from or how it is made. Instead, they are interested in the wellbeing and welfare of other individuals. It is therefore beneficial to free-ride on other people’s donations to the needy and to use the money that would have been donated for other purposes. The implication of this is that people are able to, and do, free-ride on each others donations. This model can therefore be seen to lead us to the classic problem that we encounter with the provision of public goods in that the amount provided will be below the socially optimal amount. Andreoni took up and proved this argument with regards individuals free-riding with regards the provision of public goods in his seminal paper of 1988, where he proves mathematically that the total donation tends to a certain fixed and finite point as the number of of altruists increases (I shall deal with Andreoni’s model in more detail as part of my next answer). Andreoni argued that the public good model is inconsistent with real-life evidence because we know that many millions of people do make donations to charity, and cannot be accused of free-riding. He used this to argue that there must be other motives for why people make donations and to explain the extent of donations that we observe in the real world. Andreoni also notes that public contributions would crowd out private contributions if pure altruism were predominant, which again isn’t what we observe. Andreoni argued that people make donations to charity because it gives them a “warm glow”. That is, the individual enjoys donating per se. They are not concerned about the outcome of the donation as is the case in the public good altruism model. Instead they derive utility from making a donation and from the act of donating, and are not concerned with the direction of this donation. Some have argued that this is not a true model of altruism as those that make donations are not concerned about the welfare of others when making their donations, and are donating for almost selfish reasons. This may be true, but the paradox is that because the individuals are making these donations for private reasons they are not able to free-ride on the donations made by others because they will not then appreciate the warm glow affect. The absurdity is therefore that although it can be criticised as a ‘non-proper’ form of altruism, it is associated with higher levels of donations and of raising more money than the pure model because donations cannot be free-riden upon. Individuals are making their own donations to please themselves! The upshot is therefore that the private-good model of altruism is associated with higher levels of donations and a greater extent of charitable giving compared to the public-good model of altruism.   (b) Examine whether private charity could ever adequately replace the Welfare State. Any response to this question most focus on the two seminal papers by James Andreoni of 1988 and 1990, which reject, with proof, the idea that the public good altruism model is able to lead to a socially optimal provision of public goods. Under the public good model of altruism, individuals care deeply about the welfare and wellbeing of other individuals in society, and wish to ensure that they receive a certain standard of living, and are prepared to make donations to ensure that this happens. For example, let us consider an example where there are two individuals. Individual B is poor, and individual A is rich and an altruist. Individual B’s consumption will form part of individual A’s utility function, as positive externality on individual A’s utility. We can see that the socially optimal solution Qs will not be achieved in this instance, and the market will fail to produce a socially optimal solution in much the same way as we have come to expect in public good cases where positive externalities are present. At this point free-market economists would argue that the two individuals being rational would have every incentive to join together to reach an agreement whereby at least one is better off and neither is worse off (this process would typically happen with them agreeing to meet and redistribute wealth to ensure a socially optimal solution). This follows from the theory of Coase, and in this instance would see individual B agree to make a lump-sum donation to individual A up to the point where the socially optimal solution is achieved. Coase’s theorem relies on a very strict set of assumptions being satisfied. These are that there are clear and distinct property rights, that there are no transaction costs and that there are static curves everywhere. However, it is hard to believe that these conditions will be satisfied and that they will hold. In the simple two case model as presented here it seems reasonable to think that there are distinct property rights and no transaction costs, but the idea that demand curves will remain static seems implausible. This is not least because it seems unlikely that upon receiving the donation the poor persons demand curve will not shift out due to income effects. Even if we were to believe this, the idea that private markets could lead to socially efficient solutions is rejected by Andreoni. Andreoni uses complex maths (well above my level!) to show that as the number of altruists increases more and more individuals will free-ride, ultimately leading to a less than optimal provision resulting from donations. More specifically, Andreoni is able to demonstrate that as the number of altruists increases that a) the total donation will approach some finite figure, t , b) that the average donation will tend to zero, c) that the proportion of the population making donations will tend towards zero, d) and that only rich people will make donations. This mathematical proof demonstrates that public-good altruism will not be sufficient to replace the welfare state. Even with a population full of altruists a socially efficient and optimal solution will not be reached. There will be an under-provision of the public good. Andreoni offered his own model of “warm glow” altruism in which individuals are not concerned about the outcome of the donation as is the case in the public good altruism model discussed previously. Instead they derive utility from making a donation and from the act of donating, and are not concerned with the direction of this donation. Some have argued that this is not a true model of altruism as those donating are not concerned about the welfare of others when making donations, and are donating for almost selfish reasons. This may be true, but the paradox is that because the individuals are making these donations for private reasons they cannot free-ride on the donations made by others. The absurdity is therefore that although it can be criticised as a ‘non-proper’ form of altruism, it is associated with higher levels of donations and of raising more money because donations cannot be free-riden upon. Individuals are making their own donations for the sake of their own utility. The upshot is therefore that the private-good model of altruism is associated with higher levels of donations and a greater extent of charitable giving compared to the public-good model of altruism. However, although this will lead us towards the socially efficient and optimal quantity, it is still likely to deliver results that are less than the socially optimal amount. It seems that the only way that we can hope to achieve a socially efficient result is through the use of compulsory donations organised by the state. Even then, I do not believe that this will produce optimal solutions, but it appears that this is the method that will get us nearest to an optimal solution. -------------------------------------------- [ 2 ]. Independent Sector (1990), Giving and Volunteering in the United States: Findings from a National Survey,