Charitable giving

Datacharmer posted recently on the links between charitable giving and wealth, following work by Arthur Brooks. Brooks asserts that:

Emerging evidence—crunchy statistics from real data, not the mushy self-help stuff—supports the contention that giving stimulates prosperity, for both individuals and nations. Charity, it appears, can really make you rich.

To prove this, he regresses income on giving and, to prove causality, he uses volunteering as an instrument for giving. Now for volunteering to be a valid instrument in this case, it would have to be both well correlated with giving levels (fine) and unrelated to income levels (hmmm). While divine favour is promised to those who give, I don’t think this provides us with firm evidence. The trouble is in the number of ways in which income and time spent volunteering could be related. The data on which this work was done comes from the S.C.C.B. survey and a quick look at the variables shows that income is reported at the household level, not the individual. What is often the result of household income rising above a certain level? Stay at home housewives. What do housewives do when the kids are at school (or gone for good)? Volunteer. This is just one possible link between income and volunteering. Another is raised in a comment on the previous post – poor households have to work all hours to make ends meet. As income increases and the budget constraint eases, more time is available to volunteer. I would view the results of this IV work with extreme caution.

The other half of Brook’s work concerns higher levels of giving leading to greater wealth at a national level. I find this story far more plausible. Two of the major recipients of donated funds are universities (at least in the US – in 2006, 14% of total giving went to educational organisations) and organisations working with the socially disadvantaged. It is not hard to imagine a causal chain going from increased funds into education to increased levels of human capital and to increased wealth, or from more social work to greater labour force participation and to increased wealth.

So giving to charity might not make you richer directly, but it probably will benefit your country.

An alternate view of chritable giving is here. The authors propose a view in which giving is a status seeking activity (quite possible with alumni giving in the US) and as such is an inefficient use of resources. They show that under certain conditions it would be optimal to tax charitable donations, rather than giving the usual Pigouvian subsidy. Very interesting.

by Forrest | Friday, November 09, 2007
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