Essays on the provision of public goods

Abstract

In Chapter 2, we present a model that allows us to study the effect of increased competition among charities for donations, and show that it will result in a lower provision of public goods. When charities get donations, they must pay two fundraising costs: a travel cost and an extra cost, a "premium" in our terminology. This premium arises from the extra time, effort, or incentives a charity must provide to garner a contribution from a donor who is solicited by other charities. Increased competition raises this premium, which leads to deadweight loss, so that revenue net of fundraising costs falls after a new firm enters into the market.

A problem with public goods markets is asymmetric information between charities and donors, such that donors do not know which charities will cheat. In Chapter 3, we show that honest charities can get more donations than dishonest charities by investing in a capital stock. We study a two-period model under two assumptions, one where first-period investment does not affect the provision of public goods in the second period, and one where first-period investment does affect the provision of public goods in the second period. In the first case, we prove the existence of a separating equilibrium where honest charities make an investment and dishonest charities invest nothing. Thus, donors will donate more to charities that make investments, even if the investment is not used to produce public goods. In the second case, honest charities may invest the efficient amount, overinvest, or underinvest, depending on the donors' beliefs.

In Chapter 4, we borrow parts of the models in the previous two chapters in order to see what effect the signaling cost has on the number of firms and average revenue. In our model, donor utility increases when they give to a charity that matches their ideology. We are interested in the long-run equilibrium, so unlike in Chapter 2, we assume there is free entry in the market. The two important results are that the number of firms decreases and average revenue increases if the required signaling cost increases.