Seminar Philantrocapitalism

Abstract

Whether philanthropy is an effective instrument to correct market and political failures remains under scrutiny. Yet governments provide generous tax incentives to philanthropists, and when the wealthiest individuals create eponymous foundations and donate millions to finance public goods, society often welcomes their actions with enthusiasm. In this paper, we investigate the conditions under which philanthropists improve social welfare by providing alternative public goods when philanthropy is subsidized through tax credits, as is common in many European countries and U.S. states. Our results show that when the technology of public good provision exhibits increasing returns to scale, philanthropy may generate inefficiencies through two channels: distortions in the production of public goods and changes in the political equilibrium via the behavior of the median voter. Specifically, we find that when the median voter has intermediate income, she may prefer a lower tax rate in the presence of a philanthropist. This adjustment in taxation can either increase or decrease total welfare, depending on the gap between average and median income. In our framework, any aggregate welfare gains from philanthropy arise from increases in the welfare of high-income individuals, offset by welfare losses among low-income individuals.