Strategic Interaction in the Market for Charitable Donations : The Role of Public Funding

Government financing of charities influences their fundraising activity and private donations. To analyze the market for donations, we combine the model of fundraising of charities and donors introduced by Andreoni-Payne (2003) and the production structure of output maximizing charities suggested by Aldashev-Verdier (2010). We modify and extend this mixed model of two groups of donors and two charities by concentrating on warm-glow motivation for giving and strategic interaction in the market for donations. Services are produced with a purchased input and in-house managerial supervision competing with fundraising for time. In the absence of government support, fundraising by charities are strategic complements given fixed costs. We show that block grants can change the nature of the competition and that fundraising will be strategic substitutes if grants exceed fixed costs. A charity receiving a grant will indeed reduce its fundraising, but the competing charity may solicit more intensively, thereby affecting the output of the one receiving the grant. The competitor will deliver more services because it benefits from the reduction in solicitation by the grant recipient. In this setting, matching grants work like block grants as charities in both cases will compete less intensively for donations. However, if both instruments are used the impact of a matching grant depends on whether the block grant over- or undercompensates for fixed costs. An optimal funding policy must account for this interaction effect