Media Briefings

Increasing Income Inequality Drives The Outsourcing Of Public Services Delivery To The Third Sector

  • Published Date: March 2008

The surge in the size of the third sector as a way of delivering public services
in the UK and elsewhere stems directly from increases in income inequality.
That is the central conclusion of new research by Professors Ignatius
Horstmann and Kimberley Scharf, published in the March 2008 issue of The
Economic Journal.

According to their analysis, this is not only because higher inequality
increases social needs, but also because the increased economic segregation
brought about by inequality makes it more difficult to fund government
provision through the tax system.
The authors comment:
‘Government support and encouragement for the expansion of the
third sector can be understood as a natural consequence of
increasing income inequality rather than as a deliberate strategy for
addressing inequalities.’
In the UK and elsewhere, both political devolution and the devolution of
government competences to non-government, third sector organisations are
high on the policy agenda. Promoters of political devolution argue that it
brings government closer to the people. Those championing the third sector
view non-government organisations as better able to respond to
people's needs.
In this study, the researchers identify a previously uncovered and unexplored
link between these two governance trends. Political devolution is fuelled by
the segregation of people according to tastes and socio-economic lines,
including income. An increase in income inequality – as we have witnessed in
the last 20 years – promotes the creation of communities of individuals with
similar incomes.
The resulting exit of higher income individuals from poorer communities
reduces the scope for a lower-income majority to fund the public provision of
goods and services through progressive taxation, with the result that there is
comparatively less reliance on government provision and more on provision
by the third sector. Political devolution and the devolution of competences to
the third sector thus go hand-in-hand.
The analysis is based on standard theoretical constructs that capture the
process of economic segregation, the mechanisms of political choice and the
economic determinants of giving behaviour. While these are all wellestablished
constructs, they are combined for the first time in order to explore
the relationship between voluntary giving and community formation.
The resulting predictions are able to account for many observed patterns in
the evolution of local public finances in the United States and elsewhere –
patterns that have previously not been recognised as being linked. Such
predictions are also supported by preliminary empirical work focusing on
contributions to Boys & Girls Clubs in the United States.
Notes for editors: ‘A Theory of Distributional Conflict, Voluntarism, and
Segregation’ by Ignatius Horstmann and Kimberley Scharf is published in the
March 2008 issue of The Economic Journal.
Ignatius Horstmann is at the University of Toronto. Kimberley Scharf is at the
University of Warwick.
For further information: contact Ignatius Horstmann on +1 416 978 1888
(email:; Kimberley Scharf on 02476 523742
(email:; or Romesh Vaitilingam on 07768 661095