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Nonprofits, Crowd-Out, and Credit Constraints

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  • Harrison, Teresa

    ()
    (School of Economics LeBow College of Business Drexel University)

  • Laincz, Chris

    ()
    (School of Economics LeBow College of Business Drexel University)

Abstract

We introduce a model of an infinitely-lived nonprofit organization facing donor crowd-out by government grants and credit constraints. The nonprofit chooses the optimal allocation of resources over time between providing service and fund-raising activities. We show that the response of fund-raising expenditures to grants not only hinges on the effect of grants on the productivity of fund-raising as in static models, but depends critically on the timing of grants and credit market access. When nonprofits face credit constraints, increases in future grants lead to reductions in fund-raising because nonprofits reallocate resources over time. In previous nonprofit theories of crowd-out, a negative relationship between grants and fund-raising expenditures follows from an assumption that the marginal productivity of fund-raising expenditures decreases with government grants. In contrast we provide robust empirical evidence that government grants increase the marginal productivity of fund-raising, which is inconsistent with the key assumption of those theories. Moreover, we provide strong evidence of intertemporal resource allocation with limited credit access as predicted in our theoretical model. We discuss why the distinction matters for policies supporting nonprofit public good provision.

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Bibliographic Info

Paper provided by LeBow College of Business, Drexel University in its series School of Economics Working Paper Series with number 2013-5.

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Length: 54 pages
Date of creation: 23 May 2013
Date of revision:
Handle: RePEc:ris:drxlwp:2013_005

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Web page: http://www.lebow.drexel.edu/
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Keywords: nonprofit; crowd-out; fund-raising; government grants; credit constraints;

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References

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  1. Riber, D.C. & Wilhelm, M.O., 1996. "Altruistic and Joy-of-Giving Motivations in Charitable Behavior," Papers 1-96-4, Pennsylvania State - Department of Economics.
  2. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February.
  3. Rose-Ackerman, Susan, 1987. "Ideals versus Dollars: Donors, Charity Managers, and Government Grants," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 810-23, August.
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  10. Hungerman, Daniel M., 2009. "Crowd-out and diversity," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 729-740, June.
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  12. Arthur C. Brooks, 2000. "Public subsidies and charitable giving: Crowding out, crowding in, or both?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(3), pages 451-464.
  13. Harrison Teresa D. & Laincz Christopher A, 2008. "Entry and Exit in the Nonprofit Sector," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-42, July.
  14. Gruber, Jonathan & Hungerman, Daniel M., 2007. "Faith-based charity and crowd-out during the great depression," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1043-1069, June.
  15. James Andreoni & A. Abigail Payne, 2003. "Do Government Grants to Private Charities Crowd Out Giving or Fund-raising?," American Economic Review, American Economic Association, vol. 93(3), pages 792-812, June.
  16. Duncan, Brian, 1999. "Modeling charitable contributions of time and money," Journal of Public Economics, Elsevier, vol. 72(2), pages 213-242, May.
  17. Okten, Cagla & Weisbrod, Burton A., 2000. "Determinants of donations in private nonprofit markets," Journal of Public Economics, Elsevier, vol. 75(2), pages 255-272, February.
  18. Charles Grant, 2007. "Estimating credit constraints among US households," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 583-605, October.
  19. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
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