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More tax incentives needed to weed out inefficient ‘warm-glow’ charities

Better tax incentives for private donations could weed out inefficient and self-interested ‘warm- glow’ charities, according to research.

In a study published in the Journal of Public Economics, Professor Kimberley Scharf from the University of Warwick claims that warm glow on the part of charities could undermine efficiency within the charitable sector.

‘Warm-glow’ charities refer to inefficient organisations who carry on operating because they believe their provision is better than other charities raising funds in the same area. They get a warm glow from the work they are doing, regardless of the fact that they are not providing a good service.

Professor Scharf said: “Unlike the warm glow that donors get when they donate, which can promote private giving, warm-glow motives for charity providers can have adverse effects on efficiency. There are no real mechanisms for measuring performance in the not-for-profit sector and inefficient charities can adversely affect distribution of funds.”

If funds are distributed directly to charities through government grants, government may face verification constraints that may reduce its ability to screen efficient charities. It would need to go through a process with the charity, whereas private donors do not have those restraints.

Professor Scharf said: “As a private donor, we can look at a charity and decide if we think they are worth giving our money to or not. We don’t have to go through a process, we just stop giving them money and so inefficient charities that were not delivering output would have to close. Relying on tax incentives as alternatives to direct government grants may improve charity selection and performance.

“Impure altruism in charitable organisations essentially diverts funds away from more efficient charities that could provide a greater quantity of the public good. Donor discretion lowers entry incentives by less efficient charities and thus improves selection.”

Notes to editors:

The paper, ‘Impure Prosocial Motivation in Charity Provision: Warm-Glow Charities and Implications for Public Funding’ appears in Journal of Public Economics, Vol 114, June 2014.

A copy of the paper is available: http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/scharf/cesifo1_wp4479.pdf

To speak to Professor Scharf, please contact Kelly Parkes-Harrison, Senior Press and Communications Manager, 02476 150868, 07824 540863, k.e.parkes@warwick.ac.uk

PR 2nd July 2014



The paper, ‘Impure Prosocial Motivation in Charity Provision: Warm-Glow Charities and Implications for Public Funding’ appears in Journal of Public Economics, Vol 114, June 2014.
A copy of the paper is available

Kelly Parkes-Harrison, Senior Press and Communications Manager, 02476 150868, 07824 540863, k.e.parkes@warwick.ac.uk