The Distortionary Effects of Subsidies for Charity in a Federal System
Brian D. Galle
Boston College Law School
June 20, 2011
Boston College Law School Legal Studies Research Paper No. 229
Prevailing accounts of the efficiency of subsidies for the nonprofit sector presume that the only alternative source of public goods is a single sovereign, controlled by a single median voter. Tiebout sorting, however, also provides citizens with alternative bundles of public goods. When these two systems are in place simultaneously, they may interact. We present a model in which subsidies may affect not only the choice between nonprofit and government, but also the choice among governments. Because nonprofits allow citizens to obtain alternative bundles of public goods without relocation, subsidies for the nonprofit sector alter incentives to relocate. We show that this distortion in the market for local government may either increase or decrease welfare, depending on the nature and geographical scope of the good provided. As a result, for some goods it is ambiguous whether subsidies for charity on net increase social welfare. We also consider extensions involving simultaneous provision of similar goods of differing quality.
Number of Pages in PDF File: 28
Keywords: Federalism, Tiebout, Nonprofit Organizations, Charity, 501(c)(3)
JEL Classification: H11, H77, K29, K34, L33
Date posted: June 19, 2011 ; Last revised: June 21, 2011
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