Charitable giving with stochastic income

Abstract

This paper evaluates the effect of income volatility and income source on charitable giving, in a laboratory setting. Using three income sources (windfall, investment-based, and earned), we find that the proportion of income subjects donate decreases monotonically with the level of effort required to obtain the income. We also find that income volatility causes an increase in giving, both in terms of donation amounts and the proportion of income donated. These effects are driven primarily by subjects who received their income through windfall gains. Relative to the baseline, subjects are more generous when they face highly-volatile income, even when they experience a negative income shock, although they are more sensitive to positive shocks; we estimate income elasticities of charitable giving of 0.8 for positive income shocks and 0.4 for negative shocks.