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    Private Contributions & Social Recognition

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    Carmen Donovarros

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    © All Rights Reserved
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    ALL THAT GLOWS IS NOT WARM GLOW: PRIVATE CONTRIBUTIONS AND SOCIAL RECOGNITION by Ratna K, Shrestha and Kwang Soo Cheong ‘Working Paper No. 01-1 January 2001 ALL THAT GLOWS IS NOT WARM GLOW: PRIVATE CONTRIBUTIONS AND SOCIAL RECOGNITION Ratna K. Shrestha” Department of Economics, Memorial University of Newfoundland Kwang Soo Cheong Department of Economics, University of Hawaii at Manoa Abstract By considering social status-seeking consumers who derive utility from the social recognition of their contributions to public goods, we investigate the efficiency and equity aspects of the equilibrium supply of public goods. Our model departs from the previous studies, such as Andreoni's (1989, 1990) warm-glow model, in that an individual's utility is affected only to the extent that his contribution is socially recognized and hence his social status enhanced. Specifically, his utility is represented by a function not only of his consumption of private and public goods but also his social status, which is then a function of the size of his relative contribution and the observability defined as the extent to which his relative contribution is publicly observed. This type of utility function is supported by an experimental result that we are mostly egoistic rather than altruistic in balancing our welfare with respect to that of others (Offerman, Sonnemans and Schram, 1996), and an empirical finding that anonymous donations are far less popular (Glazer and Konrad, 1996). Our model obtains a unique, stable Nash equilibrium in which the supply of public goods critically depends on the distribution of income and the observability parameter. Interestingly, an increase (decrease) in the observability for income losers (gainers), for a given income redistribution, leads to an increase in the supply of public goods. In the absence of such income redistribution, the increase in the observability of the relative contribution of low- income egoists may force them to bankruptcy. We show that grouping consumers by income levels and allowing them to play the Nash game only within their respective groups may prevent this potential problem without compromising the total supply of Public goods. We also discuss the implications of our analysis in the context of global pollution control and community-based charity Key Words: Public Goods, Private Provision & Social Status JEL Classification Code: H41 * Corresponding Author. Mailing Address: Department of Economics, Memorial University of Newfoundland, St. John’s, NF AIC 587, Canada. Phone: (709) 737-2010, Fax: (709) 737-2094, and Email: rshresth@mun.ca 1. Intreduction In the pure altruist model of private provision of a public good, it is well known that each contributor faces a prisoner’s dilemma type of situation resulting in its underprovision. Following Becker’s (1974) suggestion, Andreoni (1989, 1990) and Hollandar (1990) have introduced a public-good model in which individual contributions are motivated by, in addition to altruism, a desire for a warm glow. This impurely altruistic (mix of both altruistic and egoistie motives) model results in a higher supply of the public good than that suggested by the pure altruist model. Under this impurely altruistic framework, ‘Andreoni (1990) demonstrates that the redistribution of incomes will not be neutral as in the pure altruistic model,’ but will increase (decrease) the equilibrium supply of public goods if the transfer of income takes place from an egoistic (altruistic) to a more altruistic (egoistic) individual. While deriving this result, Andreoni assumes that an individual receives a warm glow for bis contributions whether they are observable or not, to the community. However, Glazer and Konrad (1996) argue that people usually do not contribute to public goods, particularly charity, in return for simply a warm glow but to show off their wealth and thereby achieve higher social status (or popularity). If people donate for simply a warm glow, they would not mind making anonymous donations. However, empirical evidences from charity show that people hardly make anonymous donations. For example, out of 2240 donations that Pittsburgh Philharmonic received in ‘ Under the purely altruistic framework, Warr (1982, 1983), Russell (1984), and Bergstrom et al. (1986) have shown that the redistribution of income among consumers is, neutral to the total equilibrium supply of public goods. "This argument is analogous to the theory of conspicuous consumption that dates back to Thorstein Veblen (1899) who argued that individuals consume conspicuous goods to advertise their wealth and in turn earn higher social status or popularity. See also Bagwell and Bernheim (1996) and Bernheim (1994). 1991 only 29 were anonymous, Similarly, out of $462 donations that Camegie Mellon University received in 1989-1990, only 14 were anonymous (Glazer and Konrad, 1996). In light of the taste of individuals to eam social status by showing off their contributions toa public good, this paper explores the possibility of providing them higher incentives (to contribute) by making their relative contributions observable to more members of the community. Recently, Harbaugh (1998) has analyzed how a charity can provide incentives to individuals to contribute more by publicly reporting their donations. He found that the {otal donation will be higher when it is reported in the form of dollar category than in exact amount, Thus, Harbaugh's analysis shows that the incentives to contribute to public goods depend on whether the social status is a discrete or a continuous function of donations. In the present model, we consider how the social acclaim one receives and hence egoistic motive for contribution can depend on the observability of his relative contribution. For simplicity, we measure the degree of observability of a contribution in terms of the proportion of the community members who can observe it The degree of observability of a contribution, irrespective of its size, depends on the nature and/or frequency of its reporting. For example, a contribution reported on TV (or several times) may have a higher degree of observability than one broadcast on radio (or fewer times). Once the community members observe the contribution, they praise the contributor. This in turn increases the social status (or egoistic) motive for contribution to the public goods » This assumption makes it easier to assign the lower and upper bound for the degree of observability. The observability of a contribution is one if all the members of the community can observe it and zero if none of them can observe it In addition to the observability, we assume that only the contribution that is higher than the mean contribution derives social status. This assumption is plausible because social status is a relative matter. For example, if everybody makes the same level of contribution, the relative social status of the contributors would not change. We can also think of relatively low social status (or even loss of status) for all those contributions that fall below the mean, The level of one’s contribution relative to that of others largely depends on how egoistic (or altruistic) he is; highly egoistic individuals will contribute much more than less egoistic (or more altruistic) individuals and vice versa. This assumption is consistent with the experimental result of Offerman et al., (1996) that individuals contributions are guided by their ‘value orientations'—the weights they attach to their own welfare relative to that of others. Thus in the proposed model, a contribution to a public good that deviates from the mean enters the utility function twice as in Andreoni (1989, 1990) and Becker (1974) models. First, it enters as a part of a public good and, then as a part of a social status, which is private in nature. However, note that in the current model, unlike in Andreoni-Becker model, an individual's social status depends on his relative (not absolute per se) contribution and its observability. The above relationship, that egoistic motive for contribution increases with its observability, together with the nonneutrality result of Andreoni (1990) show that the supply of public goods can be increased, for a given income redistribution among the consumers, by increasing (decreasing) the observabilities of the relative contributions of income losers (gainers). In the absence of such redistribution, the increase in the observabilities of the relative contributions may force low-income egoists to bankruptcy, particularly when the distribution of income is highly unequal. This is because, in such a heterogeneous group, lower-income egoists may have to contribute all of their incomes to meet the average contribution and maintain their social status. We show that the segregation of consumers into subgroups by income levels can prevent this potential problem without compromising the total supply of the public good. Section 2 presents the basic model in which individuals contribute to a public good not only for altruistic but also for social-status reasons. In this model, the equilibrium supply of the public good increases with the observabilities of the relative contributions of the egoists. Section 3 shows that an increase (decrease) in the observability of the relative contribution of an income loser (gainer) increases the total supply of the public, good. Section 4 analyzes how the segregation of the consumers into subgroups by income levels can prevent low-income egoists from bankruptcy without compromising the total supply of the public good. Seetion 5 briefly discusses the implications of the proposed model for the control of global pollution and raising funds for charitable services. Finally, Section 6 concludes. 2. Observability of Private Contribution: Basic Model Consider an economy with 2 consumers, indexed by i = J, 2, ... 2, of a public good, g. Consumer i is endowed with w, > O units of a private good which can be allocated for the consumption of private good, x, or for the contribution, g,, to public good g. The total supply of public good g = g,+ g. where g, is the contribution by the rest of the consumers other than i. Thus, the budget constraint of # is x; + g; In the impure altruism model of Andreoni (1989, 1990), each consumer's utility is represented by means of a twice continuously differentiable and strictly quasi-concave utility fant n, w(x, & g)). Following Glazer and Konrad’s (1996) observation that individuals do not contribute to the public good for a ‘warm glow’ but to show off their social status, we replace gin the utility funetion with a social-status function, We assume that consumers eam (loose) social status only from those contributions which are observable and are higher (lower) than the mean contribution. Given this utility function, a public-good manager (e.g., # charity manager) can play a significant role in influencing the social-status motives for contribution of the egoistic consumers.* The manager can report and publicize individuals’ relative contributions to the public good on TY, radio, or other publications. The members of the society who observe such contributions, in tur, accord social acclaim to the contributor, Such social acclaim instills motivation among the egoists to compete for higher contributions equal to (or above) the average, leading to the increase in the total supply of the public good. Let us denote the social-status function for consumer i by 7, =f[g)— g.(n- 1)] = 4 [g— ng, n-J)], where 0 0 {see Andreoni, 1990 for the derivation of this result). The third argument is due to the presence of the term in the first order condition. The derivative of f(.) with this term, fi, is positive. Lemma 1 (Existence, Uniqueness, and Stability): If preferences are represented by continuous and strictly quasi-concave utility functions u,(x,, g,7;) and both public good, g, and private good, x,, are normal, then for some plausible levels of observabilities, 47s, of relative contributions to the public good, a unique Counot-Nash equilibrium of the contribution game exists, Moreover, if 0 < f, + nf f,(n - 1) <1, such an equilibrium is stable. (See Appendix for the proof.) Proposition 1: If at least one consumer is impurely altruistic with social-status function given by r; = A [g,—g,/(a-1)], the equilibrium supply of public good, g, increases with the observabilities 4's of the relative contributions, Proof: Totally differentiating Eq. (5), and then rearranging the terms, we get ©) ‘The coefficient @ (0 Ni(N-1) for all N> n. 3. Non-neutrality of Income Distribution 10 In the purely altruistic model, Warr (1983) and Bergstrom et al. (1986) show that the total supply of a public good is independent of the distribution of income. However, this theoretical result is not consistent with the empirical findings. For example, an empirical study by Hochman and Rodgers (1973) shows that the size distribution of income significantly affects the donation patterns to local charities. Andreoni (1989, 1990) argues that impurely altruistic motives for contribution to a public good may be one reason for the nonneutrality of the distribution of income. Under this impurely altruistic model, he demonstrates that the redistribution of income from egoistic to more altruistic individuals will increase total contribution. In this section, we analyze how the observability of a relative contribution can affect the total supply of the public good brought about by such income redistribution. Proposition 2: Given the preference and budget constraint of consumer / by (1) and (2) respectively, an increase (decrease) in the observability, , of the relative contributions of a income loser (gainer), for a given income redistribution, increases the total contribution to the public good. Proof: Let dw = (dw, dw... dw,), then income redistribution among the consumers implies that Saw, |, Totally differentiating the Nash supply function given by Eq. (5) and rearranging the terms dg Yaw, ® This is identical to the result obtained by Andreoni (1990). The result says that income transfer will increase (decrease or not change) the total supply of public goods, if ul income gainer is less egoistic (more egoistic or as egoistic as) the income loser. However, in the current model, unlike in Andreoni’s model, a; depends not only on fj, and /, but also on and n, In particular, the value of a; decreases (increases) with the increase (decrease) in the value of J and its effect is more pronounced when m is higher. The implication is that the total supply of the public good can be increased by increasing (decreasing) the observabilities of relative contributions of income losers (gainers). OE.D. ‘Our result is consistent with the notion of equity in the sense that the increase in the observability of relative contributions of income losers (that is, richer consumers) provides them higher incentives to contribute to the public goods. However, when there is no ineome redistribution in the economy, one way to increase the total supply of the public good, as shown in the previous section, is to increase the observability of the relative contributions of the egoists. One disadvantage of this proposal is that it may force poor egoists to bankruptcy. If the distribution of income among the contributors is, highly unequal and the considered public good is a substantial fraction of their combined income, lower-income egoists may have to contribute all of their incomes to meet the average contribution and thus maintain their social status. In the following section, we propose a scheme which can address this potential problem of bankruptey without compromising the total equilibrium supply of the public good. 4. Neutrality of Income-Group Segregation 12 ‘This problem of potential bankruptey can be prevented by segregating contributors into subgroups by income levels and allowing them to play the Nash game only within their respective groups (not across the groups).” If individuals with close income levels are grouped together, they would more likely be able to finance the contribution which is closer to their group-specific average contribution, Intuition says that in a homogenous (by income) group, group members will have less incentive to contribute. Contrary to this intuition, we show that the regrouping of individuals according to their incomes has no effect on the total contribution to the public good. Lemma 2. If the contributors, each of whose preference and budget constraint are given by (1) and (2) respectively, are segregated into k subgroups with number of contributors in group; = /, 2, ..kequal ton, such that °n, =n and are allowed to play the Coumot- * Nash game only within their respective group, the Cournot-Nash equilibrium of such a contribution game is unique and stable, if 0 5;x,, But in equilibrium, the total contributions to the public good and the total consumption of the private good must be equal to the total initial endowment of the private good. That is, 37x,’ + g’= Sw, = 3jx,+g. Since 3x,’ > 5;x, it must be that g’ < g~a contradiction to our initial assumption that g’ > g. Therefore, there cannot be two Nash equilibria, ‘The stability of the equilibrium can be proved as follows. Subtracting g, from both sides of Eq, (5), we get the reaction function of /as a function of the rest of the contributions. = Ho + 8 Ag B)~ 8. Bs Partially differentiating with respect to g,, we get the slope of the reaction function of i 20 aA, ae.) cere ae Send From the slope of the reaction function, we ean directly infer that if 0

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