Event Date
"Welfare analysis with nonlinear budget sets and evidence from a large charitable fundraising experiment"
Abstract: The compensating variation of a subsidy requires knowing an individual's preference over the choice set without a subsidy and the choice set with the subsidy and a reduced income. We show how to identify these preferences directly using nonlinear budgets and estimate the average excess burden of a subsidy. Our approach affords heterogeneity and is applicable when differential methods are difficult to implement, i.e. when subsidies create notches. We illustrate the approach in a large field experiment with charities using threshold matches that pay a fixed subsidy to the charity when a donation exceeds a threshold. Threshold matches cost-effectively increased out-of-pocket donations, but the excess burden of the subsidy increased in the threshold level. The excess burden of a \$500 threshold match is about 45c per dollar of subsidy, whereas this is 9c for a \$25 threshold match. We assess the desirability of threshold incentives against alternative subsidies.