How Does Charitable Giving Respond to Incentives and Income? New Estimates From Panel Data

Abstract

We estimate the elasticity of charitable giving with respect to persistent and transitory price and income changes using a 1979-2006 panel of tax returns. Our estimation procedure allows for anticipation of and gradual adjustment to tax changes, controls for various potential sources of omitted variable bias via fi xed effects and income-class specifi c year dummies, and allows for a fl exible non-linear relationship between income and charitable giving. Our most convincing estimates are identifi ed by differences in the time-paths of tax incentives across states, and suggest a persistent price elasticity in excess of one in absolute value.

How sensitive is the average taxpayer to changes in the tax-price of giving?

“…An obvious choice is the exogenous change in the tax rate (conditioning on a given level of taxable income). Exogenous variation in marginal tax rates has been explicitly relied upon in both tax-filer and survey data studies to estimate price elasticities of giving in the past (e.g., Feldstein 1995;Bakija and Heim 2011). We pursue an instrumental variable approach and find evidence that our proposed instruments (detailed in Sect.…”

“…A common solution to this issue in the literature, using both taxfiler and survey data, has been to omit these endogenous itemizers, generally a small share of the sample, leaving only exogenous itemizers in the sample. In studies using tax-filer data, this exclusion is sufficient to expunge the endogenous price variation (e.g., Lankford and Wyckoff 1991;Randolph 1995;Auten et al 2002;Bakija and Heim 2011), providing consistent estimation of the price elasticity of giving for the average itemizer.…”

A theory of outsourced fundraising: Why dollars turn into “Pennies for Charity”

“…10 We show that as in practice, charities may view paid solicitations as an investment into acquiring new donors who can then be re-solicited. In…”

“…Thus, outsourcing is profitable for the charity only if giving is very price-inelastic. That, however, is strongly refuted by empirical evidence on elasticity (Clotfelter, 1985;Randolph, 1995;Auten et al 2002;Eckel and Grossman, 2003;Bakija and Heim, 2011;and Huck and Rasul, 2011), as well as lab data on preferences for giving (Andreoni and Miller, 2002;Fisman et al 2007). …”

“…These papers, however, do not model fundraising as an endogenous, costly undertaking. Fixing donor behavior, Rose-Ackerman (1982) provides a first model of costly fund-raising as a means of informing donors of the charitable cause as 10 The Pennies report reveals that about 10% of campaigns results in a loss for charities.…”