A note on the economics of philanthropy
On 12 October 2017 a joint conference on “Rethinking Global Philanthropy: Can Philanthropy Bridge the Development Gap?”, organised by Le Monde, Le Temps and the Graduate Institute, took place at Maison de la paix. In a background note for the conference, Nathalie Monnet, PhD Student in International Economics, and Ugo Panizza, Professor of International Economics at the Graduate Institute, provide estimates of philanthropic giving in advanced and middle-income economies and discuss how innovative financial instruments can leverage charitable giving.
“A Note on the Economics of Philanthropy” starts with a literature review. The authors identify three areas of philanthropic literature that involves economics: (1) the reasons for giving, (2) tax incentives, and (3) crowding-out effects through public grants.
- There are two theories as to why people donate to philanthropic causes. Either the process of donating is associated with the emotional feeling of giving; these are the so-called warm-givers, who tend to donate small amounts to many charities/philanthropies. Alternatively, people donate out of purely altruistic reasons. This group tends to donate large amounts to a specific cause and does not expect any rewards for their donation. In many western countries, donating to philanthropic or charitable causes is encouraged with tax incentives.
- Tax incentives can be treasury efficient, meaning that the percentage increase in the value of the gift g exceeds the percentage decrease in the taxation associated with the gift t. Simply put, the benefits from the gift are greater than the costs from the lower tax income. Alternatively, tax incentives can be socially efficient, meaning that the costs of providing the same service with public goods and lower taxes are higher than the costs incurred to the philanthropy.
- Finally, the literature deals with the issue of the crowding-out effect of private donations through public grants: charities or philanthropies receiving public grants receive less private donations as they tend to reduce their fundraising activities (accounting for roughly two-thirds of the reduction).
The authors then turn to the question as to how much money is donated globally and what the differences across countries are. Using data from the Center for Global Prosperity (CGP) at the Hudson Institute, they find that philanthropic giving has risen globally by USD 22 billion between 2006 and 2014 and reached USD 64 billion in 2014. The largest share of philanthropic giving comes from the United States (70%), with the second-biggest origin country (United Kingdom) trailing far behind with 8%. Examining philanthropic giving in Europe and the United States more closely, they find that there are consistent cross-country differences in the number of foundations, the causes these foundations give to, as well as the channels through which the donations take place. The authors critique the lack of data and the non-comparability of different datasets as an obstacle to estimating philanthropic giving more exactly.
In a next step, Monnet and Panizza present possibilities for philanthropic causes to get involved in the financial markets. “Impact investing” at the same time generates a financial return for the investor while creating a positive and measurable social impact. The challenges arising from such an investment approach are the tradeoffs that have to be done depending on whether the investment should primarily focus on making a positive social impact or creating a financial return. Additionally, it can be a challenge to define and measure social impact in a particular investment. Impact investing can be combined with traditional philanthropic giving as foundations could re-allocate some of the traditionally invested assets in their portfolio toward impact investing, thus at the same time not only donating to worthy causes, but also investing reserve assets effectively. In addition, social finance, which includes social impact bonds, development impact bonds and humanitarian impact bonds, has been an increasingly popular trend among investors. Social impact bonds, for example, do not generate a fixed rate of return, as the return from the investment depends on the success and social impact of the investment project. Investors are being repaid in full only if the target of the social programme or investment project is met. The motivation behind this type of investment is risk sharing, as the costs of an unsuccessful programme are shared with external investors, who in turn have an interest in the success and therefore increase their monitoring of the bond-issuer and the project. The drawback of impact investing and social finance is that projects considered too risky or immeasurable might remain unfunded, no matter how great their social impact.
Finally, the authors talk about the drawbacks of philanthropy, such as the favourable tax treatment, which can lead to tax evasion, as well as the crowding-out effect and influence of powerful foundations. Large foundations might be tempted to downplay the importance of programmes they do not support. Additionally, their focus on a specific cause may crowd out funds necessary for other important causes such as primary care, nutrition or transportation as governments in developing countries may re-align priorities in order to get support from these large foundations.
Monnet and Panizza conclude that the economic literature shows the usefulness of tax incentives insofar as they encourage philanthropy and can be used to substitute for public grants. However, more research is needed to evaluate the social efficiency of tax incentives, as well as to improve the data collection on philanthropic giving across countries.
Full citation of the working paper: Monnet, Nathalie, and Ugo Panizza. “A Note on the Economics of Philanthropy.” International Economics Department Working Paper 19/2017, Graduate Institute of International and Development Studies, Geneva, 2017.
By Nadia Myohl, Master student in International Economics