02/2010 Kim Scharf and Sarah Smith

Evidence shows that individuals do not always take tax attributes into account when making their choices. We focus on tax relief for charitable contributions. Although rational donors should view a match and a rebate of the same value as being equivalent, survey evidence shows that nominal donations are more likely to adjust in response to a change in the rebate than to a corresponding change in the match. We argue that these patterns are consistent with the predictions of a model of rational inattention, whereby a majority of individuals choose to process rebate changes while forgoing to process match changes.

Behavioural Economics and Wellbeing