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Is charity a homogeneous good?

  • Backus, Peter

    (University of Warwick)

In this paper I estimate income and price elasticities of donations to six different charitable causes to test the assumption that charity is a homogeneous good. In the US, charitable donations can be deducted from taxable income. This has long been recognized as producing a price, or taxprice, of giving equal to one minus the marginal tax rate faced by the donor. A substantial portion of the economic literature on giving has focused on estimating price and income elasticities of giving as the received wisdom suggests that a price elasticity greater than unity is indicative of the ‘treasury efficiency’ of the tax deductibility of charitable contributions, as the loss to tax revenue is less than the increase in giving. However, a major limitation of nearly all the previous attempts to identify such effects has been the implicit assumption that charity is a homogeneous good, meaning giving to one type of charity is a perfect substitute for any other and that the causespecific responsiveness of giving to changes in price and income is equal across those causes. If this assumption is violated, then estimates may be biased and policies designed to increase charitable contributions may be sub-optimal. Results suggest that the tax-price of giving only affects giving to religious organisations and that the income effect is invariant over charitable causes.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2010/twerp_951.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 951.

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Date of creation: 2010
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Handle: RePEc:wrk:warwec:951
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