DP7760 Rational Inattention to Subsidies for Charitable Contributions
|Author(s):||Kimberley Scharf, Sarah L. Smith|
|Publication Date:||March 2010|
|Keyword(s):||rational inattention, salience, subsidies for giving, tax incentives|
|JEL(s):||D0, D8, H2|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7760|
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.