Keep Charity Charitable

Abstract

This Article responds to recent claims, most prominently by Malani, Posner, and Henderson, that much of the work of the charitable sector should be farmed out to for-profit firms. For-profit firms are said to be more efficient because they can offer higher-powered incentives to cut costs. I argue, however, that because of the high costs of monitoring and the presence of externalities, low-powered incentives are preferable for firms that produce public goods. Further, allowing some for-profit firms to receive charitable subsidies would raise the cost of producing those goods in government or other firms, because it would diminish the “warm glow” workers enjoy from being recognized as self-sacrificing.

Keywords: nonprofit organizations, charity, for-profit charity, venture entrepreneurship, warm glow, section 170, privatization

JEL Classification: D21, D64, H41, H24, K34, L33