The Signaling Role of Charitable Contributions by Businesses: A Tax Policy Perspective

Tomer Blumkin, Yoram Margaliioth, Efraim Sadka and Adi Sharoni

No 6106, CESifo Working Paper Series from CESifo

Abstract: Empirical evidence suggests that charitable contributions to public goods may be driven not only by the familiar warm-glow of giving motive but also as a means for businesses to signal high product quality. Building on this finding, we present an analytical framework that characterizes the optimal government policy, assuming that the government may either directly provide the public good or subsidize its private provision. We show that in the optimal solution the government should subsidize the private provision of the public good and refrain from direct provision. We further demonstrate that the optimal degree of subsidization should decrease with the extent to which the signal is informative, and may even turn into a tax when the signal is sufficiently strong. Finally, we compare the current practice in the US, a charitable contribution deduction provided by Section 170 of the US Tax Code, with the optimal design suggested by our normative analysis and offer changes that would bring the Section closer to the social optimum.

Keywords: public goods; Pigouvian taxation; warm glow; signaling (search for similar items in EconPapers)
JEL-codes: H20 H40 K30 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp6106.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6106

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().