Do Government Grants to Private Charities Crowd Out Giving or

Fund-raising?By James Andreoni and A. Abigail Payne

When the government makes a grant to a private charitable organization, does it displace

private giving?• Rather than just accepting the common

theory on government grants and the “crowding out” effect (people view their tax dollars as substitutes for private donations) this paper examines a second explanation for crowding out. They test the theory that increases in government grants result in decreased fundraising efforts which subsequently results in a decrease in private donations and diminishes the overall effectiveness of the government grant.

Principal Assertions• While contributions to charities may fall when a

government grant is received, the reason may lie with the charities’ fund-raising efforts, not solely with the givers

• “As government grants to a charity increase, fund-raising efforts by that charity will decrease”

• “If the government increases its grant to a charity, the total level of charitable services will always rise, although not by the full amount of the grant, due to a combination of reduced fund-raising and classic crowding-out”

Theoretical Model

• Givers give primarily because they are asked• “power of the ask”• Fundraising efforts=funds

• Individuals give to charities that align with their ideals• Assuming that individuals have different

preferences for charities they give to

Ctd.

• Nash Equilibrium• Charities move first in selecting the number of

households they will solicit• Game theory comes in to play when it comes

to the givers’ preferences

Ui = ui (xi , Cj ; ℓij)

Fundraiser Choice

Data

• Data on nonprofit revenues and expenses come from federal tax returns filed by IRS Section 501(c)(3) organizations for the period 1982 to 1998, excluding 1984.

• Nonprofits are divided into two groups:• Arts organizations• Social Service organizations

Why?

1. Represent different types of charitable goods and services in terms of the sectors of the population served

2. Difference in reliance upon government grants/assistance

3. Contrast of one-dimensional and multidimensional organizations

Data Cleaning

1. Many zeros reported in the measures of interest

2. Divergent accounting practices3. Anomalies in the data*Says there are four but only three are listed…liar

Exclusions• Three or fewer years of observations• Zero government grants for all years• Zero private donations for all years• Zero fundraising expenditures for all years• Three or more occurrences of reporting zero fundraising

expenditure and positive private donations in two consecutive years

• Suspicious observations• Leaves 2,417 observations and 233 arts organizations; 4,954

observations and 534 organizations for the social services

Empirical Specification

Measurement Issues• Timing• Uses of the organization’s fundraising

expenditures (positive bias)• Some government grants are in the form of a

matching grant (positive bias)• Fundraising expenditures are skewed towards

zero so OLS might not be the best framework*We’re happy to report that he learned how to count to four at this point in the paper

OLS and Tobit

• The issue of expenditures skewed towards zero is controlled through the use of Tobit specification

• A tobit specification relates the non-negative dependent variable (fundraising expenditure) and the independent variables

Two-stage Least-squares Estimation

• Nervous that some unobservable variable exists that affects both G and F

• Exclusion Restriction:• VGF

Potential Instruments

• State-level transfers control for the size of the government budget

• Level of government representation• Research funding to state universities• proxy for the level of resources that may be

available from the government for distribution

Arts OrganizationsSocial

Service Organization

s

Results

• Results reveal a negative relationship between government funding and fundraising efforts for the arts organizations

• Same for services organization except with a lesser effect

Ctd.

• Using NIH funding as an instrument, a $1,000 increase in government grants decreases arts organizations’ fundraising by $264.70

• The same measurement for social services organizations results in a $53.75 decrease

• Why?• Tax reforms from 1986• Differences in structure

Conclusion

• Governments do have an impact on the fundraising efforts of charities

• Furthermore, this impact is more severe for arts organizations compared to social organizations which are more dependent on government grants

Policy Implications

• Matching grants• Circumvents the drop off in effort as a result of

receiving grants by requiring organizations to meet a certain quota

• Substitution of involuntary tax for voluntary contributions• Addresses deadweight loss