WEALTHblog: Distributional Consequences of Philanthropic Provisioning of Public Goods

A standard result in political economy is that, in the absence of government’s control and regulation, a system of voluntary and private donations would undersupply public goods. However, these models rarely theoretically investigate, or empirically test, the allocational consequences of philanthropic and voluntary provision, especially in ethnically diverse and socially stratified societies. How do the elite’s charitable contributions affect the distributional equilibrium across ethnic groups and social classes? I explore the allocational consequences of private provisioning of public goods in a new working paper “The Rich, the Poor, and the Other: Distributional Consequences of Philanthropic Provisioning of Public Goods” using historical data on drinking water sources in Ottoman Istanbul.

Most studies on the distributional consequences of public goods provision deal with the factors that shape both the demand and supply-side determinants of the type, quality, targets, and geographical coverage of state-financed public services. Although the geographic scope and the substantive focus of these studies differ consider- ably, with a few exceptions (Cammett and MacLean, 2014), most assume that the state has a monopoly over providing public goods, as well as responsibility to guarantee an equal distribution.  This statist approach ignores the distributive impact of the charitable contributions of non-state actors. It also assigns a monopolistic power to state institutions in financing and producing public goods and infrastructure. Given the abundance of seminal studies that conclude that in the absence of governmental institutions; free-riding reinforces an under-provision of public goods (Samuelson, 1954; Warr, 1983; Andreoni, 1988), the legitimacy of governments is often linked to the sufficient provisioning (Kaul et al., 2003). As Taylor (1987) puts it: “The more persuasive justification of the state is founded on the argument that, without it, people would not successfully cooperate in realizing their common interests and in particular would not provide themselves with certain public goods.”

However, these statist investigations tend to ignore the historical and ongoing contributions of private actors through charitable endowments. For one thing, the state’s involvement in financing and supplying public goods is a modern concept. Most pre-modern states collected taxes to finance wars and sustain armies, not necessarily to provide sanitary drinking water or education (Besley and Persson, 2008). Before the emergence of the modern state, it was often the economic elite or the religious institutions that invested in such projects.

For another, one of the most significant contemporary debates in politics involves whether public goods and infrastructure should be provided by the government or by private actors. A prominent argument in favor of the private provision of public goods is often grounded in the mistrust of the government’s ability to use tax revenues effectively. A notable example involves billionaire Michael Dell’s reactions to a proposal to implement a 70 percent tax rate on the US’s top earners: “My wife and I set up a foundation about 20 years ago and we would’ve contributed quite a bit more than a 70 percent tax rate on my annual income.” he said. “I feel much more comfortable with our ability as a private foundation to allocate those funds than I do giving them to the government.”2 This is a common trend among the super-rich. In fact, private contributions to social services are significant; in 2018, US citizens gave a total of $410 billion to nonprofits, representing almost 2 percent of the GDP (Giving USA Foundation, 2019).

However, the advocates of minimum state involvement in the provision of public goods have largely overlooked that there is little evidence that private entities do better than governments    in achieving an equal and efficient distribution of public services. Although a considerable amount of literature has been published on the links of state provision of public goods and allocational inequalities, our understanding of the distribution of privately provided public goods is limited. This is partly due to the paucity of reliable data, and more importantly, to the difficulty of isolating the impact of private contributions from those provided by the state.    What are the distributional implications of the philanthropic provision of public goods in the absence of government supervision? How does ethnic fractionalization impact the distribution of privately financed public goods, especially when the rich and powerful are likely to be members of relatively privileged ethnic or racial groups? Can private provision achieve equal outcomes when there is no central and formal mechanism holding providing actors accountable for their potential failures?

To help answer these questions, I propose a mechanism that links social networks, ethno- religious diversity, and social stratification to distributional outcomes. In particular, I hypothesize that in the absence of centralized government coordination, the elite’s ethnic and personal networks shape the choice of the location in which they provide a public service. In the absence of political accountability, the economic elite gains material, reputational, and altruistic benefits from voluntarily contributing to public goods. These gains are magnified when the elites are socially connected to a locality in which they provide a service. Additionally, when there are no institutions of governmental or bureaucratic accountability, the penalty for shirking can be only operationalized through social sanctioning, which also requires personal connections between the provider and the residents of the locality. Accordingly, I expect the elites to over-provide philanthropic goods and services to locations in which they are connected, either personally      or geographically.  Given that people are better connected to those who live in the same locality, as well as to those who share the social-economic and ethnic background, I argue that co-ethnic and predominantly elite localities attract more voluntary provisioning of free public goods, infrastructure, and services.

I test this argument using an original dataset on fountains providing drinking water in Ottoman Istanbul from 1876. The dataset includes the ethno-religious and socio-economic com- position of the city’s neighborhoods. I find that, in accordance with my theoretical framework, the elite over-provided clean drinking water to co-ethnic and elite neighborhoods. On average, neighborhood with elite residents received 70 percent more fountains when compared to non- elite neighborhoods, whereas predominantly non-Muslim neighborhoods got 30 percent fewer fountains than Muslim neighborhoods.  These results suggest that, in the absence of democratic accountability and centralized planning, philanthropic provisioning can reinforce existing structural inequalities.

          These results inform current social and political debates in many places. As most of the economic elites choose to channel their earnings into trusts and foundations, a theoretical and empirical study on the distributional implications of private financing of public services fills an important gap in the literature.

 

Works cited:

Andreoni, J. (1988). Privately provided public goods in a large economy: the limits of altruism.

Journal of public Economics 35 (1), 57–73.

Besley, T. and T. Persson (2008). Wars and state capacity. Journal of the European Economic Association 6 (2-3), 522–530.

Cammett, M. and L. M. MacLean (2014). The politics of non-state social welfare. Cornell University Press.

Giving USA Foundation (2019). Giving USA 2019: The Annual Report on Philanthropy for the Year 2018. Chicago.

Kaul, I., P. Conceicao, K. Le Goulven, and R. U. Mendoza (2003). Providing global public goods: managing globalization. Oxford University Press.

Samuelson, P. A. (1954). The pure theory of public expenditure. The Review of Economics and Statistics 36 (4), 387–389.

Taylor, M. (1987). The Possibility of Cooperation. Cambridge University Press.

Warr, P. G. (1983). The private provision of a public good is independent of the distribution of income. Economics letters 13 (2-3), 207–211.

 

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