Limits of Altruism Revisited: the Role of Differentiated Public Goods

It has long been a puzzle in economics why people donate so much to charity. Donating to charity is like contributing to a public good. When people are altruistic and care about, say, animal rights, they will willingly contribute to the public good of animal rights protection. Yet altruism has it limits. When there are many citizens who are all altruistic and care about animal rights, they will start free-riding each other and scale down their individual contributions. Economic theory predicts that this free-riding effect is very pervasive, so much so that it is puzzling why people, albeit being altruistic, donate so much.

In a seminal paper aptly titled “The Limits of Altruism”, Andreoni (1988) enumerates three empirical facts that classical models of altruism cannot explain: (1) the proportion of citizens who donate to charity is much larger than the theory predicts, (2) the amounts they donate are much larger than the theory predicts, and (3) the government’s contribution to public goods does not crowd out private contributions as much as the theory predicts.

Since Andreoni (1988), economists have suggested different theories to resolve the puzzle. For example, people may donate simply because they enjoy donating (Andreoni, 1989, 1990); and people sometimes do good deeds to assure themselves that they are indeed good people (Benabou and Tirole, 2002, 2006).

While we do not deny the validity and importance of these complementary theories, we also believe the importance of altruism has been under-appreciated, due to a simplifying assumption in classical models. Specifically, classical models typically lump all charitable activities into a single public good. When citizens make charity donations, they all donate to this single public good, and hence everyone is free-riding each other. In reality, there is a garden variety of charitable activities, and different citizens may care more about different ones. If different citizens specialize in donating to different charities, the free-riding problem will be much weaker than previously predicted.

Simple and intuitive this theory may seem, it has far-reaching implications that go beyond the mere intellectual curiosity of why people donate. First, it provides sharp prescriptions on where the government should allocate its public money in order to crowd in and avoid crowding out private donations to charities. Second, it uncovers a novel instrument for crowdfunding platforms to capitalize on the complementarity of different crowdfunding projects and boost the efficacy of crowdfunding efforts. Third, it sheds new light on the conceptual difference between a diverse society and a polarized society, and why only the former but not the latter results in a more harmonious society