Discussion Paper Details

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Title: Rational Inattention to Subsidies for Charitable Contributions

Author(s): Kimberley Scharf and Sarah L. Smith

Publication Date: March 2010

Keyword(s): rational inattention, salience, subsidies for giving and tax incentives

Programme Area(s): Public Economics

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.

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Bibliographic Reference

Scharf, K and Smith, S. 2010. 'Rational Inattention to Subsidies for Charitable Contributions'. London, Centre for Economic Policy Research.