Glazer, Amihai; Konrad, Kai A.
A Signaling Explanation for Charity.
In: American Economic Review, Vol. 86, No. 4: pp. 1019-1028
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This article examines a novel but plausible motive for charitable giving. Charitable donations which are observable can signal wealth or income. The signaling equilibrium of charitable donations has attractive properties. Donations increase proportionally with population size. Governmental funding for public goods affects private charity only through an income effect. Crowding out need not be complete. Income redistribution is generically nonneutral. Increasing the spread between the poorest and richest person in a community tends to increase private donations. Our theory are based on the assumption that people are willing to make charitable donations even if they will not increase provision of the public good. The data on charitable giving support the hypothesis that donors donate at least partly for signaling purposes rather than only to aid the recipient or to obtain satisfactions unrelated to status. Though charitable organizations usually report donations within categories, thus not allowing perfect revelation, for analytical tractability we shall consider an equilibrium with perfect revelation and a continuum of types, as characterized in George J. Mailath (1987) and Norman J. Ireland (1994).