Rational Inattention to Subsidies for Charitable Contributions
Kimberley A. Scharf
London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD); University of Warwick - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Bristol; Institute for Fiscal Studies (IFS)
CEPR Discussion Paper No. DP7760
Recent evidence suggests that individuals do not always take notice of tax attributes when making their choices. This paper focuses on the case of tax relief for charitable contributions. Although a fully rational donor should view a matched payment to the receiving charity and a tax rebate of the same value as being fully equivalent, evidence from a survey shows that nominal donations are significantly more likely to adjust in response to a change in the tax rebate than to a corresponding change in the match. The patterns of responses across different donors that emerge from the survey cannot be readily explained by the presence of administrative costs or differential warm-glow effects, nor from the match being a more "shrouded" attribute in comparison with the rebate. Rather, we argue that these patterns are consistent with the predictions of a model of rational inattention, whereby a majority of individuals deliberately choose to process changes in the rebate while forgoing to process changes in the match.
Number of Pages in PDF File: 34
Keywords: rational inattention, salience, subsidies for giving, tax incentives
JEL Classification: D0, D8, H2working papers series
Date posted: April 5, 2010
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