Errors in Variables and Estimated Price Elasticities for Charitable Giving

David Joulfaian () and Mark Rider

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: Researchers often rely on self-reported tax data to gauge the effect of taxes on an economic activity. Such data are subject to measurement errors when individuals intentionally misreport their attributes for tax purposes. To the extent that these intentional reporting errors vary with the tax price and after-tax income, which are important regressors in tax price models, estimated elasticities may be biased. We examine the effect of intentional errors-in-variables in tax price models with an application to charitable giving. We employ a random sample of tax returns subject to extensive audits in order to gauge the magnitude of this potential bias. When the theoretically correct measures of the regressors are used the estimated price elasticity of giving is considerably larger, and the income elasticity is somewhat smaller than conventional estimates using self-reported data. We also find evidence of simultaneity between giving and unreported income. Then, we evaluate the efficacy of using a measure of skewness of the distribution of income (third moment) observed in cross-sectional data as an instrument for the mismeasured variant. We find that this instrument performs reasonably well. Based on this finding, we propose a method to diagnose whether the estimates are subject to measurement error bias and a methodology employing Two-Stage Least Squares to obtain unbiased estimates.

Keywords: Errors in Variables; Price Elasticities; Charitable Giving (search for similar items in EconPapers)
Pages: 39 pages
Date: 2003-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://icepp.gsu.edu/files/2015/03/ispwp0307.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper0307

Access Statistics for this paper

More papers in International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University Contact information at EDIRC.
Bibliographic data for series maintained by Paul Benson ().