Solving Charity Failures

“Crowdfunding” is a way of using the Internet to raise money by asking the public to contribute to a project. In the past, asking a large number of people to contribute small amounts of money to a project was expensive and inefficient for most organizations and individuals. By greatly reducing transaction costs, crowdfunding enables anyone to inexpensively and efficiently seek small contributions to a project. While crowdfunding is a new model of fundraising, it has already transformed funding for the arts. For example, the crowdfunding platform Kickstarter distributed more than forty million dollars to the creators of almost seventy-five hundred projects within two years of Kickstarter’s launch. On March 3, 2014, Kickstarter announced that it had received more than one billion dollars in pledges from 5.7 million backers. By comparison, the 2014 budget for the National Endowment for the Arts was $146 million. Kickstarter is only one of many crowdfunding platforms, which have collectively distributed billions of dollars to creative and charitable projects. This Article argues that crowdfunding has succeeded, at least in part, because it makes charitable giving more efficient by solving certain “charity failures,” or inefficiencies created by the inability of the charitable contribution deduction to subsidize the charitable giving from low-income donors. The economic subsidy theory of the charitable contribution deduction explains that the deduction is justified because it solves market failures and government failures in charitable goods. According to this theory, free riding causes market failures in charitable goods, and majoritarianism causes government failures in charitable goods. The charitable contribution deduction solves these market and government failures by indirectly subsidizing charitable contributions, thereby compensating for free riding and avoiding majoritarianism. This Article argues that crowdfunding is successful because it provides a technological solution to some of those charity failures. While the charitable contribution deduction causes charity failures because the deduction cannot subsidize contributions from low-income donors, crowdfunding can subsidize those contributions by offering rewards instead. As a result, crowdfunding should solve at least some of the charity failures caused by the deduction through providing an incentive for low-income donors to contribute. The remarkable success of crowdfunding suggests that the inefficiency associated with charity failures is quite large. This Article proceeds in four parts. Part I explains the economic subsidy theory of the charitable contribution deduction. Part II shows why the premises of the economic subsidy theory imply that the deduction causes charity failures. Part III argues that crowdfunding can solve at least some of those charity failures. And Part IV suggests that the success of crowdfunding may reflect persistent inefficiency in the market for charitable goods