Tax-Price Elasticities of Charitable Giving and Selection of Declaration : Panel Study of South Korea

This study estimates the tax-price elasticity of donations, considering the bias caused by the fact that the claim of tax incentives for charitable giving depends on the taxpayer’s decision. We first present a way to eliminate this bias by supporting the intention-to-treat analysis. We then estimate the price elasticity by our method, using exogenous variation in tax incentives due to the 2014 tax reform in South Korea. We find that a 1% increase in donation prices reduces donor contributions by 1.6% and the donor ratio by 2.6%. Next, we use the control function approach, one of the instrumental variable methods, to examine how endogeneity from the decision to use tax incentives biases the estimation of price elasticity. We find that those with large amounts of charitable giving without tax incentives do not declare their giving, leading to an underestimation (in absolute value) of the price elasticity of donors’ contribution amount.