Should Gift Giving Be Subsidized?
Charitable giving, which is generally intended to serve as nonmarket insurance, is large and pervasive. Two thirds of all households gave charitable gifts in 1995, the sum of which was over $100 billion. Stiglitz (1987), Kaplow (1995) and others argue that gift giving should be subsidized because it causes a positive consumption externality, but they derive this conclusion in a setting of complete information. We introduce risk and uncertainty into the gift giving decision in a simple general equilibrium model. When the source of risk is endogenous with respect to gift giving, we show that the optimal subsidy unambiguously falls, and could become a tax on giving. When gift giving provides nonmarket insurance against endogenous risk, it imposes a negative externality on the market and the market responds by reallocating risk in ways that are detrimental to the recipients. Our findings demonstrate the importance of considering the market's reaction to gift giving when determining the optimal subsidy.
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|Date of creation:||01 Feb 1999|
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