The Moderating Effect of Tax Incentives on Donor Sensitivity to Nonprofit Efficiency

ABSTRACT This study examines the moderating effect of tax incentives on donor response to efficiency. By using state-level marginal tax rates to introduce tax variation in the nonprofit organization (NPO) program efficiency model from Weisbrod and Dominguez’s (1986) seminal paper, I demonstrate that donors are more likely to contribute to less efficient NPOs when presented with high tax incentives. This result challenges the premise by Weisbrod and Dominguez (1986) that donor response to the after-tax cost of giving is exaggerated and indicates that donors consider both the after-tax cost and the program cost of giving when making donation decisions. Data Availability: All data are available from public sources. JEL Classifications: H24; H40; L31; L38.