Modelling charitable donations to an unexpected natural disaster: Evidence from the U.S. Panel Study of Income Dynamics

Abstract

Abstract:Using household-level data, we explore the relationship between donations to the victims of the 2004 Indian Ocean tsunami disaster and other charitable donations. The empirical evidence suggests that donations specifically for the victims of the tsunami are positively associated with the amount previously donated to other charitable causes, which accords with complementary rather than substitution effects. This relationship exists when we decompose overall charitable donations into different types of philanthropy, with charitable contributions to caring, needy and religious organizations having the largest positive association with donations to the victims of the tsunami.When we explore the impact of donations to the victims of the tsunami on future donations to charity, however, our findings suggest an inverse relationship with the largest inverse association with donations to needy and caring organizations.

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

“…The estimated elasticity is − 1.24 (95% confidence interval − 1.59 to − 0.88). This result is closely in line with those surveyed in Peloza and Steel (2005) and Batina and Ihori (2010) and with more recent work also using PSID (Brown et al 2012;Yöruk 2010Yöruk , 2013Brown et al 2015;Zampelli 30 In general, non-donation itemizable expenditures (E) are not measured in survey data and even when information on E is available, as is the case with the PSID, it has not been, to our knowledge, included in models of donations in the literature to date. Such expenditures will be correlated with price via itemization status and likely correlated with donations since changes in, say, medical expenditures may affect one's donation amount.…”

“…By 26 Replacing P a it with P b it in our regression may lead to measurement error. Instead, some (e.g., (Yöruk 2010(Yöruk , 2013Brown et al 2012Brown et al , 2015 have used the price calculated using the first-dollar marginal tax rate as an instrument for P a it to address the endogeneity identified by Auten et al (2002). Given the very high correlation between P a it and first-dollar price in our data, we find that the use of the first-dollar price as an instrument or as a proxy provides qualitatively similar results.…”

“…To address this source of endogeneity, distinct from the source we focus on in this paper, we follow Auten et al (2002) and Brown et al (2012) in constructing an alternative marginal tax rate, τ b it calculated as the mean of the marginal tax rate setting i s giving in t to 0 (sometimes called the 'first-dollar' marginal tax rate in the literature), and the marginal tax rate calculated by setting i's giving in t at 1% of median household income (the level used in Auten et al (2002) which corresponds roughly to the median level of giving in our sample). The price variable we use in the regression analysis below is then P b it = 1 − I it τ b it which, as Auten et al (2002) note, will be 'consistent' with the actual price of giving but will not suffer from the endogeneity from donations pushing a taxpayer to a lower tax bracket (the first source of endogeneity noted in the introduction).…”

“…Footnote 4 continued a panel of tax-filer data and Yöruk (2010Yöruk ( , 2013, Reinstein (2011), Brown et al (2012) and Brown et al (2015) generally find price elasticities in excess, sometimes substantially so, of − 1 using the same survey panel data we use. In their working paper, Andreoni et al (1999) use a Gallop survey of household giving and find price elasticities ranging from − 1.73 to − 3.35, magnitudes that they note are 'consistent with the body of literature' (p. 11).…”

“…In short, as itemizing is a function of donations for endogenous itemizers, so is not itemizing a function of donations for all non-itemizers. As a result, estimators of the price elasticity of giving based on data which includes non-itemizers (e.g., Brown and Lankford 1992;Andreoni et al 2003;Bradley et al 2005;Brown et al 2012;Yöruk 2010Yöruk , 2013Brown et al 2015;Zampelli and Yen 2017) will be downward biased. 7 To understand the intuition of the price endogeneity arising from the inclusion of non-itemizers in the sample, consider the case where a taxpayer switches from being an itemizer one year to a non-itemizer the next.…”