The Signaling Role of Charitable Contributions by Businesses: A Tax Policy Perspective

45 Pages Posted: 9 Nov 2016

See all articles by Tomer Blumkin

Tomer Blumkin

Tel Aviv University - Eitan Berglas School of Economics; Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Yoram Y. Margalioth

Tel Aviv University - Buchmann Faculty of Law

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Adi Sharoni

Ben-Gurion University of the Negev

Date Written: September 2016

Abstract

Empirical evidence suggests that charitable contributions to public goods may be driven not only by the familiar warm-glow of giving motive but also as a means for businesses to signal high product quality. Building on this finding, we present an analytical framework that characterizes the optimal government policy, assuming that the government may either directly provide the public good or subsidize its private provision. We show that in the optimal solution the government should subsidize the private provision of the public good and refrain from direct provision. We further demonstrate that the optimal degree of subsidization should decrease with the extent to which the signal is informative, and may even turn into a tax when the signal is sufficiently strong. Finally, we compare the current practice in the US, a charitable contribution deduction provided by Section 170 of the US Tax Code, with the optimal design suggested by our normative analysis and offer changes that would bring the Section closer to the social optimum.

Keywords: public goods, Pigouvian taxation, warm glow, signaling

JEL Classification: H200, H400, K300

Suggested Citation

Blumkin, Tomer and Margalioth, Yoram Y. and Sadka, Efraim and Sharoni, Adi, The Signaling Role of Charitable Contributions by Businesses: A Tax Policy Perspective (September 2016). CESifo Working Paper Series No. 6106. Available at SSRN: https://ssrn.com/abstract=2866924

Tomer Blumkin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972 8 647 2268 (Phone)
+972 8 647 2941 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Yoram Y. Margalioth

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv 69978, IL
Israel
+972-3-6407014 (Phone)
+972-3-6409576 (Fax)

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9712 (Phone)
+972 3 642 8074 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Adi Sharoni

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

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