Government should create a more level playing field by subsidising core costs for charities competing to raise funds, according to an academic paper published by four economists.
Kimberley Scharf, Carlo Perroni, Ganna Pogrebna and Sarah Sandford argue that donors are unable to choose which charities are most efficient at delivering charitable outcomes because those charities have different levels of fixed costs.
Fixed costs are costs that do not scale up with output. For example, the cost of renting a car to deliver vaccinations is fixed because the rental cost is incurred only once and does not depend on how many vaccinations (the output) are being delivered.
The academics argue that an efficient charity with high fixed costs can be undermined by a less efficient charity with lower fixed costs that is better able to raise funds.
This can have the effect of either protecting established but less efficient charities from being challenged by more efficient charities, or helping less efficient charities undermine established and more efficient charities.
The paper gives particular focus to core costs as a type of fixed cost that could benefit from subsidy.
First of its kind
Are Donors Afraid of Core Costs? Economies of Scale and Contestability in Charity Markets is published in the August 2019 edition of The Economic Journal.
The study is the first to look at the impact of differing fixed costs on donors’ decision-making, and invited people to take part in experiments involving “coordination games” to support its arguments.
The experiments found that donors’ decisions could be “significantly” affected by the presence of fixed costs and that donors can be biased against providers with high fixed costs even if they are more efficient.
By extension, the academics argue that in the interests of promoting healthy competition in the marketplace, government should selectively subsidise charities’ core costs.
Government would still have the challenge of working out which charities to subsidise, but it could nevertheless seek to support either start-ups or established charities depending on which it believes is disadvantaged in the marketplace.
The academics say that providing core funding wouldn’t crowd out private donations, and would in fact increase charities’ efficiency by improving competition between them and positively influencing how they choose to organise themselves.