Extension of the model

One possible extension of the model which I discuss in some more detail here is how different motivations for voluntary giving affect the outcome of the model. So far it has been assumed that the individual is intrinsically motivated to give. Contributions are made because the individual receives utility from giving to projects which are in line with his or her preferences.

This can be seen as a combination of “warm glow” and altruistic giving. On the one hand, the individual receives utility from giving itself (not from the good that is produced, which is not modeled). On the other hand, the donor cares about how his or her money is used, i.e. he or she does not derive utility from giving if the money is not used in line with his or her preferences. Another motive for giving which is discussed in some recent scholarly articles, but has been neglected in the model so far, is social prestige.⁵⁴

3.6.6.1 Motivation

Some previous models concentrate on prestige as the only motivation for making charitable contributions, while others incorporate both prestige concerns and warm glow.

Glazer and Konrad (1996) argue that individuals strive to signal their wealth to other individuals, and that wealth can be signaled by the amount an individual donates. The authors therefore set up a utility function that depends on private consumption and other’s inferences about individuals’ net income, which in turn is a function of individuals’ charitable donations.

Glazer and Konrad (1996: 1022) note that the utility function can easily be extended to include warm glow utility.

Bénabou and Tirole (2006: 1656) develop a model where individuals receive utility from private consumption and intrinsic satisfaction from voluntary contributions to a public good (monetary or other), but at the same time care about what others infer about their character and preferences from their giving behavior and the social consequences thereof. Bénabou and Tirole (2006: 1657) go on to explain that the intrinsic motivation of the individual can be grounded both in the concern about the overall level of a public good to which the individual contributes and the pure “joy of giving.”

In a similar fashion, Harbaugh (1998) models individuals as receiving utility from private consumption, prestige and warm glow, where warm glow depends on the amount donated and prestige depends on the charity’s public reporting of the amount donated. Harbaugh’s model coincides with the discussion in Ariely, Bracha and Meier (2009: 544) who state that there are

54 For a systematic overview of donor motivations see, e.g., von Kotzebue and Wigger (2010).

three motives for voluntary giving: “[i]ntrinsic motivation” (e.g. altruism), “[e]xtrinsic motivation” (e.g. material rewards) and “[i]mage motivation” (which depends on public opinion) (Ariely, Bracha and Meier, 2009: 544 [emphasis in original]).

Soetevent (2005) shows in a field experiment in 30 churches in the Netherlands that individuals give more during services when their contribution is visible to fellow churchgoers than when it is not visible.

I follow the approaches of these authors and model prestige as part of individual’s utility. This kind of utility can only be derived from giving that is publicly recognized. In order to leave the model simple, I assume that the individual only cares about prestige and does not derive any utility from giving itself or the goods which are produced with his or her contributions.

The crucial question is then how prestige can be gained in the model. Here I argue that prestige can only be gained through voluntary giving, while paying church or assignment taxes does not entail any prestige. The reason for this assumption is that paying taxes is often seen as a duty, something that needs to be done which is not worth any special recognition.

This is surely true for state income taxes, but I also argue that the same mentality is at work with respect to the assignment tax and the church tax. In Germany there is some anecdotal evidence that church members who pay a substantial amount of church taxes do not receive any public recognition for their contributions. Norbert Feldhoff, who was vicar general of the archdiocese of Cologne and responsible for its budget, gives the following example: If a rich person in France or Italy donated 600,000 mark to the church he or she “would have a high reputation and probably get a papal medal” (Feldhoff, 1996: 59 [my own translation]). If the same person lived in Germany, he or she might be obliged to pay 1 million mark of church taxes, but nobody would take notice. If the person was not willing to pay 1m mark, the only possibility would be to disaffiliate, which would result in an excommunication – even if the person still donated 600,000 mark to the church each year. (Feldhoff, 1996: 59) A similar view is expressed in a recent article in the well-known Catholic newspaper “Christ und Welt”. The author discusses the view of church officials on rich church members, in particular rich church tax payers. She cites several people working in the finance departments of Catholic dioceses who sustain that there is no – and there should not be – special treatment for rich church tax payers. (Prange, 2012)

Another problem that complicates the extraction of social recognition from church or

not publicly known, although one can sometimes make an estimation. In contrast, charitable organizations do report the names of their donors and the amount they have contributed.

All these arguments taken together, I argue that paying church or assignment taxes does not provide any prestige for the individual.

A formal model of charitable giving by individuals who are motivated by social prestige can be found in Appendix A.5. Here I give a summary of the results and compare them to the findings from my main model.

3.6.6.2 Results

I briefly discuss the effects of the prestige model for all three systems of church financing, starting with the voluntary giving system.

In the voluntary giving system, the motive for giving does not affect the amount given and the splitting up of giving between religious and secular charitable organizations. The reason is that all voluntary giving is visible, i.e. it can always be given to organizations that make the amount given known to the public.

The same logic applies to non-members of the church in Germany. Since all their giving is voluntary, they can choose organizations that publish the names of donors. In contrast, for church members the motivation to give matters. In the prestige model everyone who cares to some extend about public recognition makes an additional (non-tax) charitable contribution because only non-tax contributions create prestige. In other words, corner solutions where individuals do not give voluntarily are not possible. Therefore, on average, church members’

religious giving is larger and secular giving is lower than in the previous framework, which implies that the prestige model predicts an even larger bias of giving away from secular organizations and directed to churches. However, total voluntary giving is also larger in the prestige model.

In addition, I find that the critical level , i.e. the income where individuals are indifferent between being and not being a church member, is lower in the prestige model. The reason is that in the previous framework individuals usually gained at least some utility from paying their church taxes (besides membership utility), but in the prestige model they do not.

Consequently, the model predicts that the more individuals are motivated by gaining social recognition with their charitable contributions, and the less they are intrinsically motivated to give, the lower will be the church membership rates.

Finally looking at the tax assignment system, I find that in the prestige model the amount given to charitable causes (including the assignment tax) and the utility of the individual are independent of whether the money is given to religious or secular causes. The individual is completely indifferent between attributing his or her taxes to the state or to the church. If one assumes that the two alternatives are chosen with the same probability, both religious and secular organizations can gain in revenues in comparison to the voluntary giving model. The prestige model helps to explain why many Italians do not use the opportunity to decide whether they want to assign the tax to the church or the state by leaving the relevant part of the tax form blank. In the regular solution of the main model individuals made their choice on the basis of the fitting parameters and . However, if individuals only care about prestige, but not about how the money given is used (which is reflected in the fitting parameters), there is no meaningful decision criterion left for the individual.

A possible track for further research could be to integrate both the intrinsic and the presige motivation to give into the utility function of the individual. Such a model could help to explain different empirical facts about giving in countries where church tax and tax assignment systems exist. On the one hand, the reputational considerations help to explain why few individuals decide for one of the alternatives in the tax assignment system. On the other hand, when the individual only cares about how his or her money is used, non-tax giving can be zero when the individual arrives at his or her preferred level of giving by paying church or assignment taxes.

3.6.7 Conclusions

Despite these limitations, the model gives insights into the economic incentives set by different church financing systems. It also provides testable hypotheses regarding the church membership and voluntary giving decisions in the countries under investigation. Although the model is not dynamic, it allows for the comparison of two individuals who differ in the relevant parameters, or one individual at two points in time when there is an exogenous change in the model parameters. However, I do not know how the individual moves from one state to the next. In the following I summarize the hypotheses derived from the model regarding the church tax system in Germany, which will be tested empirically in the subsequent chapters:

 A higher taxable income or a higher church tax rate c.p. increases the probability that the individual is not a church member.

 Individuals who have the same income and face the same church tax rate can differ in their church membership decisions if (i) they have different levels of membership benefits, , (ii) they differ in how much the spending decisions of the church reflect their preferences (parameter ) or (iii) they differ in the marginal utility from giving, characterized by and .

 If two church members differ only in membership benefits, both give the same amount of money to charity. If they differ only in the fitting parameter , those with a lower level of give more for religious purposes and less for secular purposes. If they differ only in the marginal utility from giving,⁵⁵ then religious and/or secular giving of those with smaller values of and is lower.

 The obligation to pay church taxes reduces additional (non-tax) charitable giving of church members – both for religious and for secular purposes.

 Assuming that two individuals have the same income, the same fitting parameter , the same marginal utility of giving and and face the same church tax rate, but differ in church membership status (e.g. because one has a higher membership benefit than the other), the non-member gives more to religious purposes than the church member, who either makes no additional contribution at all (corner solution) or a comparatively small contribution. The non-member also gives more to secular causes. However, the overall giving of the church member, including both church taxes and additional voluntary giving, is higher than giving of the non-member.

55 This is only valid for sufficiently low values of and . However, it is true if the reasonable assumption is fulfilled.