Rational Inattention to Subsidies for Charitable Contributions

Kimberley Scharf and Sarah Smith

No 7760, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Rational inattention; Salience; Subsidies for giving; Tax incentives (search for similar items in EconPapers)
JEL-codes: D0 D8 H2 (search for similar items in EconPapers)
Date: 2010-03
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Related works:
Working Paper: Rational Inattention to Subsidies for Charitable Contributions (2011)
Working Paper: Rational Inattention to Subsidies for Charitable Contributions (2010)
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