Serving the many or serving the most needy?

Christoph Starke ()

Economics of Governance, 2012, vol. 13, issue 4, 365-386

Abstract: Free, subsidized, or cost-covering? The decision on how much to charge for a good or service is fundamental in social business planning. The higher the fee paid by the recipient, the more people in need can be served by the additional revenues. However, charging a fee simultaneously excludes the very poor from consumption. This paper argues that the entrepreneur’s trade-off between both effects is governed by her level of poverty aversion, i.e., her preference intensity for the service of needy people with different incomes. Additionally, we account for the possibility of excess demand for the provided good and assume that applicants are rationed by non-price-allocation mechanisms. We therefore contribute to the extensive literature on the pricing and rationing behavior of nonprofit firms. Within our theoretical model, we find ambiguous reactions of the entrepreneur to a cut in donations. Given a sufficiently low level of status-quo donations, entrepreneurs with relatively high poverty aversion tend to increase the project volume, whereas those with relatively low poverty aversion do the opposite. Copyright Springer-Verlag Berlin Heidelberg 2012

Keywords: Allocation mechanism; Donation; Nonprofit; Poverty aversion; Social entrepreneur; User fee (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10101-012-0116-8

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