Revealed preferences and aspirations in warm glow theory

In warm glow models, an agent may prefer one alternative but aspire to choose another. The agent chooses her aspiration if she gets a sufficiently large warm glow payoff for acting as she aspires. This basic framework is widely used in models of turnout in elections and contributions to public goods, but is often criticized for being ad hoc. In this paper, we provide choice-theoretic foundations for warm glow theory. We characterize the empirical content of warm glow theory, show how to infer the core elements of the model from data and show that it is possible to predict behavior even when preferences and aspirations are not revealed. Our results provide support for assumptions often made in the literature and suggest new applications for warm glow models.     

A Core‐Equilibrium Convergence in a Public Goods Economy

This paper shows a core‐equilibrium convergence in a public goods economy where consumers' preferences display warm glow effects. We demonstrate that if each consumer becomes satiated to other consumers' provision, then as the economy grows large the core shrinks to the set of Edgeworth allocations. Moreover, we show that an Edgeworth allocation can be decentralized as a warm glow equilibrium.     

Optimal tax treatment of private contributions for public goods with and without warm glow preferences

Tax-favored contributions for financing some public goods may be a useful part of optimal nonlinear income tax and expenditure policy. There are two sides to the potential gain from subsidized donations. First, for a given level of public good provision, higher private donations from high earners than low earners eases the incentive compatibility constraint for donors and so can raise social welfare. This follows since considering a lower-paid job includes a perception of a drop in public good provision. Second, private donation reduces consumption, easing the resource constraint. This paper explores optimal policy, using first a model with standard preferences and then a model with a warm glow of giving. In addition to showing the conditions for the level of public goods, the paper considers the pattern of optimal subsidization across earnings levels. Analysis of optimal taxation with warm glow preferences is sensitive to the choice of preferences that are relevant for a social welfare evaluation. After considering optimal rules with formulations of social welfare which do and do not include warm glow utility, the paper considers the choice of normative criterion. Like the earlier literature, this paper assumes that organizing private donations is costless while tax collection has a deadweight burden. Since private charitable fundraising is very far from costless, the paper is an exploration of economic mechanisms, not a direct guide to policy.     

Trust,ability‐to‐pay,and charitable giving

In the literature on privately provided public goods, altruism has been motivated by what contributions can accomplish (public goods philanthropy), by the pleasure of giving (warm‐glow philanthropy), or by the desire to personally make a difference (impact philanthropy). Underlying these motives is the idea that individuals trust that their donations reach their goal. We revisit these models but allow for distrust in the institutional structures involved. An important result we derive is that trust considerations determine whether crowding out is less or more than complete, and we thus open up possibilities in terms of the extent of crowding out not currently available. We also model socially motivated philanthropy when income‐heterogeneous donors take trust and ability‐to‐pay into account. With ability‐to‐pay in social motivation, an important result we obtain is that low‐income donors may contribute more than high‐income donors (in both absolute and percentage‐of‐income terms), giving a potential theoretical foundation to the frequently observed “U‐shaped” pattern of giving.     

Institutions, motivations and public goods: An experimental test of motivational crowding

Contributions to public goods can be motivated by intrinsic factors such as warm glow altruism and fairness, as well as extrinsic incentives such as sanctions and payments. However, psychological studies suggest that formal extrinsic incentives may crowd out intrinsic motivations. In an experimental study of individual contributions to a public good we find that suasion crowded in voluntary contributions, while an extrinsic incentive in the form of a regulation led to crowding out. This has implications for the design of public policy where ranges of motivations are present.     

Crowd-out and diversity

Research has shown that altruism is lower in diverse communities. Can this phenomenon be counteracted by government intervention? To answer this question, this paper introduces diversity to the canonical model of “warm glow” giving. Diversity may have two effects on incentives: it may attenuate individuals' altruistic preferences for public goods, and it may “cool off” the warm glow that individuals get from voluntarism. Either of these effects leads to diverse communities having lower levels of public goods, consistent with prior research. However, these effects have opposite implications for the efficacy of government intervention. I then empirically investigate whether government intervention is more effective in diverse communities. For identification, I exploit the Supreme Court-mandated 1991 expansion of the SSI program. Using a new dataset of United Methodist churches from 1984 to 2000, the results show that the expansion of SSI crowded-out charitable spending by churches. The crowd-out estimate for the average church is reasonably large, but this masks significant differences in crowd-out between communities. Crowd-out occurred almost entirely in relatively homogeneous communities; there is only modest evidence of crowd-out in racially diverse communities. Thus diverse communities, while having the lowest levels of altruism, are in this instance the most amenable to government intervention.     

STRUCTURAL CHANGE THROUGH PUBLIC EDUCATION EXPENDITURE: EVIDENCE FROM CHINA

Under China's hukou system, I analyze the relationship between public education expenditure and structural change as measured by labor transfer from the agricultural to the industrial sector. I construct a two‐sector general equilibrium model, which shows that in the short term, public education expenditure crowds out industrial capital accumulation and temporarily hinders structural change, but in the long term, public education expenditure permanently reduces rural residents' education costs. An inverted U‐shape relationship implied by the empirical evidence indicates that China's current public education expenditure is far from optimal, suggesting that China should increase it, especially for rural residents. (JEL I28, O11, O15)     

Warm glow and the transmission of pro‐socialness across generations

The transmission of pro‐socialness across generations is modeled using the warm‐glow approach. The parent generation seeks to cultivate pro‐social values in their children as this would improve their material well‐being when they grow up as cooperative adults. I show that communities endowed with more productive resources have a stronger incentive to teach their children social cooperation. Thus, there is a correlation between a village's level of material well‐being and villagers’ steady‐state level of pro‐socialness. When the cost of moral education is directly dependent on the parent generation's level of pro‐socialness, the multiplicity of steady states may emerge. If a community's initial level of pro‐socialness is high, the system will reach an interior steady state; in contrast, if this initial level is low, eventually the level of pro‐socialness will approach zero in the long run. Thus communities that start with similar initial levels of pro‐socialness may end up at drastically different steady states.     

On the relation between ecosystem services,intrinsic value,existence value and economic valuation

Various attempts have been made to amalgamate the concepts of intrinsic value and ecosystem services, often with a stop-over at the economic concept of existence value. These attempts are based on a confusion of concepts, however. In this article, two types of non-use values are distinguished: warm glow value, related to the satisfaction people may derive from altruism towards nature, and existence value, related to the satisfaction people may derive from the mere knowledge that nature exists and originating in the human need for self-transcendence. As benefits to humans, warm glow and existence values can be considered ecosystem services. Neither warm glow value nor existence value represents benefits to nature itself, however. Intrinsic value lies outside the scope of the wide palette of ecosystem services.Although the concept of ecosystem services does not cover benefits to nature and the intrinsic value of such benefits, intrinsic value is not necessarily incompatible with economic valuation. Although a deontological ethics does not allow economic valuation of nature as an end in itself, consequentialism does. In consequentialism, however, intrinsic value is not attributed to nature itself, but to benefits to nature. These benefits can be economically valued on the basis of benefit transfer.     

The Consequences of Zakat for Capital Accumulation

The payment of zakat by the owners of wealth is one of the five pillars of Islam. Many countries operate with no enforcement of the obligation to pay, making zakat a form of voluntary redistribution. We analyze how zakat affects capital accumulation in a model that explicitly recognizes the voluntary nature of zakat. The voluntary payment is modeled using both warm glow and social custom frameworks. These are embedded within an overlapping generations model with heterogenous consumers and endogenous population growth. The results show that zakat can raise the capital–labor ratio when it is motivated by the warm glow but welfare can be nonmonotonic in the strength of the warm glow. In the social custom model, reduced participation can lead to a reduced capital–labor ratio as the rate of zakat is increased.     

Disentangling the sources of pro-socially motivated effort: A field experiment

This paper presents evidence from a field experiment, which aims to identify the two sources of workers' pro-social motivation that have been considered in the literature: warm glow altruism and pure altruism. We employ an experimental design that first measures the level of effort exerted by student workers on a data entry task in an environment that elicits purely selfish behavior and we compare it to effort exerted in an environment that also induces warm glow altruism. We then compare the latter to effort exerted in an environment where both types of altruistic preferences are elicited. We find evidence that women increase effort due to warm glow altruism while we do not find any additional impact due to pure altruism. On the other hand, men in our sample are not responsive to any of the treatments.     

Aid, Agriculture and Poverty in Developing Countries

The authors make two contributions to the debate on aid‐effectiveness, illustrating that for impact on poverty what matters is not just the level but also the composition and stability of aid. One specific implication of this for aid policy is that aid most effectively reduces poverty if it supports public (and other) expenditures which are supportive of agricultural development. Regression analysis confirms that these are not only direct expenditure on agriculture, but also on education and infrastructure, and military expenditure has a negative impact. Three factors appear to be particularly conducive to the development of stable pro‐poor expenditure patterns (and in particular pro‐agriculture expenditure patterns). These are expenditure strategies which protect the poor against risk, the development of stable relations between governments and aid donors, and long‐term political commitment to pro‐poor strategies by government. The argument is pursued partly by panel‐data econometric analysis of developing countries as a whole, and partly by case studies of sustained and non‐sustained green revolutions in heavily aid‐dependent countries in Africa.     

Public Expenditures,Growth, and Distribution in a Mixed Regime of Education with a Status Motive

This paper tackles the issue of growth, distribution, and the provision of public services in a growth model with human capital accumulation where heterogeneous individuals decide whether to attend a publicly funded education regime or a privately funded one. Heterogeneity of individuals is introduced via their status‐motivation which is shown to affect their choice of education. In such a framework, we obtain an inverted‐U shaped relationship between growth and the size of the public education sector. In contrast with the general wisdom, we show that a larger public education sector is compatible with both a reduction of inequalities and an increase of long‐term growth. Although we demonstrate that in a majoritarian system all individuals agree on a lower size of the public education regime than that which maximizes growth, our analysis also highlights the tension between the direct beneficiaries and nonbeneficiaries from the public regime.     

A Coordination Game Model of Charitable Giving and Seed Money Effect

If potential donors for a charity project possess the warm‐glow properties in their preferences, we can represent their behavior with a coordination game. Accordingly, we construct a simultaneous incomplete information game model of charitable giving based on a simple global coordination game. We demonstrate that merely by the effect of seed money to shift the threshold requirement of the donations for project success downwards, the proportion of donors and the total amount of donations strictly and continuously increase with the amount of seed money. This result is partially compatible with the field experimental evidence in List and Lucking‐Reiley (2002).     

Social Security Systems,Human Capital,and Growth in a Small Open Economy

We consider a small open economy in which the level of public education funding is determined by popular vote. We show that growth can be enhanced by the introduction of pay‐as‐you‐go pensions even if the growth rate of aggregate wages falls short of the interest rate. The reason is that the pay‐as‐you‐go (PAYG) system allows future retirees to partially internalize positive externalities of public education due to the positive effect of higher future labor productivity on their pension benefits. The majority support for education funding will be especially strong when the PAYG benefit formula is flat, i.e., progressively redistributive. If a flat benefit PAYG pension system is in place then the economy will achieve the highest growth rate relative to the alternative pension system designs. While such PAYG pension system may be opposed by the majority of working individuals due to inferior returns to their pension contributions relative to a funded scheme, it is likely to be politically sustained by a coalition of older individuals and lower income workers.     

Incentives for motivated agents under an administrative constraint

Consider an agent who has an expertise in producing a non-marketable good. This good is valued by a single principal, and there is a verifiable measure of the agent’s performance. Crucially, the agent is intrinsically motivated due to ‘warm glow altruism’. In addition, the agent’s budget, which is controlled by the principal, must not be less than the monetary performance-cost faced by the agent. This gives rise to a limited-liability constraint. It also restricts the agent’s ability to under-report costs. In such environment, we determine the link between the agent’s budget and performance. Our results come in contrast to the received solution of the principal-agent problem and to most in the literature on mission-motivated organisations and public services provision.     

An Analysis of FEE-HELP in the Vocational Education and Training Sector

The public vocational education and training (VET) system is one of the few areas in Australia's tertiary education system where students are required to pay upfront fees without access to loan assistance. These arrangements may lead to sub‐optimal educational outcomes to the extent that prospective students reject a VET education on the basis of short‐term financial constraints. In this paper we analyse some of the important issues related to the adoption of FEE‐HELP (a 2005 federal government financial instrument based on the Higher Education Contribution Scheme (HECS)). It is argued that income contingent loans of this kind are associated with the advantages of both default‐protection and consumption smoothing. Using data from the first three waves of the Household Income and Labour Dynamics in Australia (HILDA) survey, we examine various empirical issues associated with the adoption of FEE‐HELP in VET, including the extent of private salary returns to VET qualifications. As well, we explore issues related to the public subsidies inherent in the adoption of FEE‐HELP in VET, and illustrate the time periods involved in loan repayments for various assumptions concerning the size of the charge and the future income of VET graduates. Administrative issues are considered, as are the implications for the Commonwealth government with respect to potential subsidies associated with the design parameters. In the 2007–08 Federal Budget, the former government announced a small extension of the FEE‐HELP system into Australian VET, a reform consistent with improved tertiary funding arrangements.     

Private Benefits,Warm Glow,and Reputation in the Free and Open Source Software Production Model

A great deal of production and consumption behavior takes place in the context of social organizations that seem to fall outside of the traditional paradigm of profit/utility maximization. These organizations are voluntary in nature and rely on contributions from members to achieve their objectives. Examples include the Linux operating system and other FOSS projects, political movements, churches and religious groups, Habitat for Humanity, and similar charitable organizations. In this paper, we consider a world containing agents with heterogeneous abilities who may voluntarily choose to make effort contributions to one or more different public projects. Agents are motivated by a desire to be seen as significant contributors to important and valuable projects, the warm glow from the act of contributing, and a desire to directly enjoy the benefits of projects when complete. We find that contributions from others can be either strategic complements or substitutes. We show that Nash equilibria exist and study how agents’ abilities and project quality affect the equilibrium levels of contributions.     

Long‐term care policy with lazy rotten kids

This paper studies the determination of informal long‐term care (LTC) provided by children in a scenario which is somewhere in between perfect altruism and selfish exchanges. Parents are altruistic but children are purely selfish, and neither side can make credible commitments. The model is based on Becker's “rotten kid” specification except that it explicitly accounts for the sequence of decisions. In Becker's world, with a single good efficiency is achieved. We show that when family aid is introduced the outcome is likely to be inefficient. Still, the rotten kid mechanism is at work and ensures that a positive level of LTC is provided as long as the bequest motive is operative. We identify the inefficiencies by comparing the laissez‐faire (subgame perfect) equilibrium to the first‐best allocation. We first assume that families are identical ex ante and then consider the case where dynasties differ in wealth. We study how the provision of LTC can be improved by public policies. Interestingly, crowding out of private aid by public LTC is not a problem in this setting. With an operative bequest motive, public LTC will have no impact on private aid. More amazingly still, when the bequest motive is (initially) not operative, public insurance may even enhance the provision of informal aid.     

STRATEGIC OBJECTIVES FOR STATE‐OWNED ENTERPRISES AS A MEANS TO MITIGATE POLITICAL INTERFERENCE: AN EMPIRICAL ANALYSIS OF TWO SWISS STATE‐OWNED ENTERPRISES

When governments act as owners of state‐owned enterprises (SOEs), they are both principal and agent at the same time. The literature on steering SOEs has mainly focused on the government as the principal that must control SOEs. However, the government is also an agent, vis‐à‐vis the parliament, because democratic constitutions stipulate some form of parliamentary oversight of the government. This oversight includes checks on how the government steers SOEs. However, this oversight function gives the parliament the power and opportunity to interfere into steering SOEs, which may lead to parliamentary interventions that are not coherent with governmental steering. We draw on principal–agent literature and public‐accountability literature to show that arbitrary and hands‐on parliamentary interference pose problems for steering SOEs. We analyze whether strategic objectives for SOEs, as recommended by public corporate governance guidelines, are appropriate to minimize parliamentary interference. We hypothesize that the Swiss government avoids or mitigates parliamentary interference by mid‐term strategic objectives for SOEs, which counteract short‐term parliamentary requests. We find that the Swiss government uses mid‐term strategic objectives, particularly financial ones, to reject parliamentary demands for more intervention into SOE activities.