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Free Riders

A public good is something that benefits many people all of whom want the public good to continue to exist. However, because most public goods can be accessed without charge, there is little incentive for any one person to contribute to their upkeep. People can become free riders, they use the public goods without paying for.

The problem with public goods

However, because most public goods can be accessed without charge, there is little incentive for any one person to contribute to their upkeep. People can become free riders, they use the public goods without paying for. This problem is solved in different ways for different public goods. Some public goods like national parks and highway systems are supported primarily by forced contributions through taxes, but others like public radio and television need substantial support from charitable giving.

To explain why people donate to such public goods, economists have assumed that people are altruistic, they want the public good to exist and they give of themselves independently of any other motive. Economic models of public goods have made some strong predictions about how people should behave if they are motivated by this sort of alternate. One strong prediction is that government support through taxation should substitute for or crowd out personal giving, this is because both taxation and private gifts have the same effect in the public good.

Charitable giving at lower income levels

According to these models government subsidies won’t help, every additional tax dollars that support say Yosemite National Park should be counteracted by one fewer dollar private giving. Another prediction is that charitable giving should show strong income effects, if the public good is equally valued by everyone only the wealthy would give since only to them is the donated money in significant enough to be outweighed by the public good.

But, we know that these predictions aren’t true government subsidies to our national parks don’t completely crowd out private support and it isn’t the case that only the wealthy give many charities receive substantial support from average middle income citizens. If anything charitable giving tends to be greater at lower income levels, at least as a proportion of household income.

Altruism and gratitude

So, if charitable giving can’t be explained by pure altruism, what are the alternatives? Let’s consider two alternative explanations, one involving external benefits and the other involving internal benefits. Suppose you donated a very large sum of money to your college alma mater. If you donated anonymously you probably receive a phone call from the college’s president, perhaps a letter of gratitude from the relevant dean, you’d be thanked privately for your generosity.

But if you donated publicly much more would happen, you’d be featured in the alumni magazine, you’d be invited to fundraising dinners to socialize with students faculty and other donors it could be asked to serve in the college’s Board of Trustees, you might even have a campus building named after you. Charitable giving carries noneconomic benefits, particularly in terms of social status, it provides entry to particular social networks those in which other givers circulate.

A form of conspicuous consumption

Giving can provide status, many charities have special labels like presidents club for the most generous donors, and charitable giving can be a socially acceptable signal of wealth. It may seem paradoxical, but charitable giving is a form of conspicuous consumption: you’re spending money on something that you don’t need and that social signal of wealth is evident the people even if they don’t see your second home luxury car or vacation photos.

In fact having your name on a college building might be the single most socially acceptable way to display your wealth. Evidence that people are motivated by the non-economic benefits of giving has been found a surprising place: the annual reports from charities that have tiers of giving. You might be able to perform this very experiment by looking at the annual report of a charity you support. Some charities list their donors by tiering their annual reports one list includes everyone who gave between $100 and $249. Another list includes those who gave between $250 and $499 and so on.

People are motivated by internal benefits

If the charity list the total amount donated by each tier, you’ll find that the total is pretty similar to what would be expected if most people gave the minimum amount necessary for a given tier. That’s consistent with the idea that people don’t decide on a gift and then see what tier they fall into, instead they use information about tier to calibrate what they want to give based on the status they want to signal.

Non-economic benefits surely motivate many people to give. If anything, some people will be motivated by the desire to avoid scorn, they don’t want to be seen as a deadbeat or free rider by their peers. But, we need more to explain why people give even when social status is minimal. Why do people donate $10 a month to the public radio station for example even though they could listen for free?

Research and economic psychology and now neuroscience all converges on an alternative explanation, that people are motivated by internal benefits, the very act of giving leads to a good feeling about oneself, what’s sometimes called a warm glow feeling and that provides utility to those who give.