The consequences of Zakat for capital accumulation

Abstract

The payment of zakat by the owners of wealth is one of the five pillars of Islam. Many countries operate with no enforcement of the obligation to pay, making zakat a form of voluntary redistribution. We analyze how zakat affects capital accumulation in a model that explicitly recognizes the voluntary nature of zakat. The voluntary payment is modeled using both warm glow and social custom frameworks. These are embedded within an overlapping generations model with heterogenous consumers and endogenous population growth. The results show that zakat can raise the capital-labor ratio when it is motivated by the warm glow but welfare can be nonmonotonic in the strength of the warm glow. In the social custom model, reduced participation can lead to a reduced capital-labor ratio as the rate of zakat is increased.