Reference-Dependent Preferences and Charitable Giving

Abstract

Previous studies on charitable giving usually estimate the effect of tax price and income on charitable giving. In this paper, I find a new behavioral response of individuals to their income changes. Specifically, I introduce a model of charitable giving with reference-dependent preferences of individuals. The model implies that when the consumption level is above (below) the reference level, individuals increase (decrease) charitable giving as their income rises. This is in stark contrast to the positive income effect that is taken for granted in virtually all studies on charitable giving. Using the 2007 Survey of Consumer Finances, I confirm the predictions of the model, suggesting that people have reference-dependent preferences. I also find that the elasticity of charitable giving with respect to tax price (one minus marginal tax rate) is much higher for those who are away from the reference level than for those who are near the reference level.