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Rational Inattention to Subsidies for Charitable Contributions

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  • Scharf, Kimberley
  • Smith, Sarah L.

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.

Suggested Citation

  • Scharf, Kimberley & Smith, Sarah L., 2010. "Rational Inattention to Subsidies for Charitable Contributions," CEPR Discussion Papers 7760, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7760
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    References listed on IDEAS

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    Cited by:

    1. Sarah Smith, 2012. "Increasing Charitable Giving: What Can We Learn from Economics?," Fiscal Studies, Institute for Fiscal Studies, vol. 33(4), pages 449-466, December.

    More about this item

    Keywords

    rational inattention; salience; subsidies for giving; tax incentives;

    JEL classification:

    • D0 - Microeconomics - - General
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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