The Behavioral Economics of Welfare

Cross­posted from Tum­blr.

Epistemic Sta­tus: I offer some spec­u­la­tion, don’t re­ally un­der­stand what is go­ing on, would be glad to re­ceive more in­sight.

You some­time hear liber­tar­i­ans say that welfare is un­nec­es­sary since pri­vate char­ity can re­place it. IMO, it looks like the ev­i­dence doesn’t sup­port this: only few peo­ple donate siz­able amounts to char­ity, and his­tor­i­cally, char­ity didn’t sub­stan­tially ame­lio­rate poverty dur­ing the early In­dus­trial rev­olu­tion (to the best of my knowl­edge). In fact, welfare de­vel­oped pre­cisely be­cause the sys­tems of poverty re­lief that ex­isted in small ru­ral com­mu­ni­ties be­came ob­so­lete with mass in­dus­tri­al­iza­tion and ur­ban­iza­tion.

This seems some­what para­dox­i­cal. All Western-style democ­ra­cies have welfare sys­tems, which means that pre­sum­ably the ma­jor­ity is in­ter­ested in hav­ing a welfare sys­tem, de­spite that it is a fi­nan­cial net nega­tive for most peo­ple (that is, most peo­ple pay more money in taxes for welfare than re­ceive welfare, I think?) So, ap­par­ently most peo­ple care about the poor. In this case, why can’t char­ity re­place the welfare sys­tem?

Let’s con­sider sev­eral the­o­ries. Th­ese the­o­ries are not mu­tu­ally ex­clu­sive, and the real ex­pla­na­tion might be a com­bi­na­tion of sev­eral (or some­thing else al­to­gether.)

The­ory 1: Peo­ple don’t trust char­ity funds. Nor­mally, when you buy a com­mod­ity or a ser­vice, you can test its qual­ity di­rectly, and if it is found want­ing you will not re­turn to the same sup­plier. On the other hand, it is difficult to ob­serve the effects of char­ity if you are not ac­quainted with the re­cip­i­ents. There­fore, ver­ify­ing the trust­wor­thi­ness of a char­ity fund is much more costly than ver­ify­ing the trust­wor­thi­ness of other sup­pli­ers, and most peo­ple aren’t suffi­cient al­tru­is­tic to pay this cost.

This the­ory is some­what sup­ported by many ex­pla­na­tions I heard peo­ple give for why they don’t donate to char­ity, al­though many times it sounds a bit like an ex­cuse.

The­ory 2: Peo­ple in­deed care about the poor, but only about the poor in their neigh­bor­hood or town. There­fore, act­ing against poverty re­quires ei­ther very lo­cal char­i­ties or co­or­di­na­tion. Co­or­di­na­tion is difficult (tragedy of the com­mons) and very lo­cal char­i­ties would face even greater trust is­sues (This the­ory is an ex­ten­sion of The­ory 1.)

I liked this the­ory ini­tially, but upon de­liber­a­tion I find it difficult to be­lieve. Most peo­ple who speak out in fa­vor of helping the poor don’t seem to ex­hibit any ge­o­graphic fo­cus be­sides a fo­cus on their own na­tion. Such a fo­cus prob­a­bly ex­isted in so­cieties that pre­ceded the In­dus­trial Revolu­tion and the as­so­ci­ated at­om­iza­tion (de­struc­tion of lo­cal com­mu­ni­ties). To­day, to the ex­tent lo­cal com­mu­ni­ties ex­ist at all, they seem to be clus­tered by so­cioe­co­nomic sta­tus, so those most able to help the poor are the most re­mote from them any­way.

The­ory 3: Peo­ple hardly care about the poor at all. The main rea­son they speak and vote in fa­vor of welfare is be­cause each per­son knows eir in­di­vi­d­ual in­fluence is very weak so this sup­port costs them lit­tle. In other words, welfare ex­ists be­cause de­stroy­ing welfare is a co­or­di­na­tion prob­lem: each in­di­vi­d­ual would pre­fer not to pay it, but given that welfare ex­ists, it is bet­ter to sig­nal virtue by speak­ing and vot­ing in fa­vor of welfare (one may ar­gue that the se­cret bal­lot would have re­moved this in­cen­tive, but ac­tu­ally peo­ple of­ten de­ceive them­selves in or­der to de­ceive oth­ers, not to men­tion that vot­ing is con­strained by po­si­tions on other poli­cies as well.)

The­ory 3 seems sup­ported by Han­son’s philos­o­phy of “X is not about X,” to the ex­tent we be­lieve this philos­o­phy. It is the most cyn­i­cal and also very ironic: here, Moloch turns out to be the good guy. I would rather live in a uni­verse where this the­ory is false, but, [in­sert Li­tany of Tarsky here.]

I think it is very im­por­tant to un­der­stand the real mechanism. Among other rea­sons, if we want to im­prove the world by char­i­ta­ble giv­ing, we need to un­der­stand the in­cen­tives at work. In­deed, differ­ent ex­pla­na­tions seem to sug­gest quite differ­ent strate­gies to im­prov­ing the situ­a­tion.