Monday, February 20, 2012

Why are the poor more generous?

Poor people are more generous than rich people when giving to charities. Their donations to churches are proportionally also higher. That seems rather puzzling, as the marginal utility of consumption is higher for a poor person, to she should be less willing to give something away. Of course, you could also argue that this person is poor because she is giving away too much. But there should be a better explanation.

Julio Rotemberg offers one. He bases his model on the fact that people like making donations to causes they can identify with: they are OK with making anonymous donations in such a case because it helps like-minded people, and they like it when others agree with them, and are thus willing to help them. The model yields multiple equilibria, some in which the rich give the bulk of donations, others where the poor do. This can help rationalize why the proportion donors varies so much from one country to another, and so independently from the size of the welfare state. Some parameter values lead to people donating in the hope it will encourage others to do so. These equilibria should be dismissed, according to results I recently discussed. The model also seems to build on the fact that there is little crowding out of private charity from public funds, which I doubt according to recent evidence I discussed here. But the model predicts nicely that there is a strong incentive for charities to differentiate themselves to capture donations, even if this not increase total donations.


Red Said said...

Could it not also be the case however that the rich tend to be less generous since they may have attained their wealth by being self interested rather than altruistic?

MrIlir said...

Who gets to decide who is poor? Economists measure income and wealth but they aren't able to truly do so until they understand quality and convenience. First, you need to know what's wrong with neoclassical consumer theory. It's the root of many myths in economics. Alex Gheg's video will shock any economics student or prof.