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

01 Mar 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 well established 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.

''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

University of Toronto | +1 416 978 1888 | ihorstmann@rotman.utoronto.ca

Kimberley Scharf

University of Warwick | 02476 523742 | k.scharf@warwick.ac.uk