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Do most charities have negative utility?

melian          14 January 2016 08:13 AM

In the recent decades the number of non-profit organizations has increased several times. In the US alone the number of registered charities now exceeds one million and continues to grow at a rate which significantly outpaces population growth. However, the social consequences of this growth are not quite obvious.

In the commercial sector, increased competition generally results in improved efficiency which usually compensates for the lost economies of scale. There is no evidence that the same is true of non-profits. The crucial difference between the non-profit and the commercial sector is that service recipients in the former are not paying customers who can control service quality by switching to a competitor. Instead, the success or failure of a non-profit is largely determined by the appeal of its marketing campaign to potential donors.

Unfortunately for non-profits, the amount of money that the donors are prepared to part with is fairly rigid. Private donations consistently hover around two per cent of the GDP in the US and about one per cent in most EU countries.

     Giving's Share of the Gross Domestic Product  (SOURCE: "Giving USA")

The rigidity of these numbers implies that when non-profit organizations conduct a successful marketing campaign they do not collect more money for charity. Instead they take it away from other charitable causes. Since the increased competition only serves to drive up the overhead costs, the likely conclusion is that creating new non-profits generally reduces their total effectiveness.

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FrameBenignly 14 January 2016 06:54 PM

I don't think the evidence you've presented tells us very much as to whether or not this is indeed the case, but I find the graph surprising. I would have expected that as people's incomes grew, the percentage of their income devoted to charity would increase as well. Instead they donate the same amount as always, and spend the rest on themselves. Indeed, there appears to be little correlation between income and donations as demonstrated by the below graph. This lowers my opinion of people.


melian 16 January 2016 04:54 AM

Do you know how the data for this graph was obtained? I wonder if the trend I see in this graph (middle income group donates the lowest fraction of its income) is real.