Andreoni-McGuire Algorithm and the Limits of Warm-Glow Giving

This paper provides a full equilibrium characterization of warm-glow giving à la Andreoni (1989, 1990) by extending the Andreoni-McGuire (1993) algorithm. The characterization indexes individuals according to their free-riding or “dropout” levels of the public good. The dropout level is finite for an individual whose donation is always dictated by some altruism. We show that if all individuals have finite dropout levels, then the crowding-out becomes complete as the population size grows. This suggests that in a large economy, the crowding-out is incomplete only when a non-negligible fraction of individuals behaves as though they were pure warm-glow givers. But since these individuals are also the only contributors in a large economy, the incomplete crowding-out must be zero. We discuss implications of these extreme crowding-out predictions for charitable behavior and fund-raising strategies.