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Government Grants to Private Charities: Do They Crowd-Out Giving or Fundraising?

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  • James Andreoni

    (University of Wisconsin)

  • A Abigail Payne

    (University of Illinois)

Abstract

When the government makes a grant to a private charitable organization, does it displace private giving? This is one of the fundamental policy questions in public finance, and much theoretical and empirical research has been devoted to understanding the relationship between private donations and government funding. Under the classic crowding-out hypothesis, donors let their involuntary tax contributions and substitute for their voluntary contributions. This paper raises the prospect of a second reason: that the stretegic response of the charity will be to pull back on its fundraising efforts after receiving a grant. We develop a theoretical model to show a charity that chooses its level of fundraising efforts strategically will reduce fundraising in response to government grants. We then analyze data on tax returns of 474 social services organizations and 245 arts organizations between 1982 and 1996. These two types of charitable organizations differ in both the nature of the services they provide and in their reliance on private donations and government grants. We find evidence that government grants to nonprofits are causing significant reductions in fundraising efforts, after looking at different types of fundraising activities. This finding is important for two reasons. First, it means that the behavior of the nonprofit organizations is consistent with the predictions of an economic model within a strategic environment. Second, it adds an important new dimension to the policy discussions on the effectiveness of government grants to increase the services of charitable nonprofit organizations. Charities are not passive receptables of contributions, as they have so often been treated in the past, but are active players in the market for donations. When the government gives a grant to charities, we shoul take into account the behavioral response of the charity itself, as well as the behavioral responses of the individual donors.

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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0111001.

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Date of creation: 05 Nov 2001
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Handle: RePEc:wpa:wuwppe:0111001

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Web page: http://128.118.178.162

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Keywords: nonprofit organizations; fundraising; crowd-out; private donations; government grants;

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References

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  1. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  2. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-77, June.
  3. Payne, A. Abigail, 1998. "Does the government crowd-out private donations? New evidence from a sample of non-profit firms," Journal of Public Economics, Elsevier, vol. 69(3), pages 323-345, September.
  4. Khanna, Jyoti & Posnett, John & Sandler, Todd, 1995. "Charity donations in the UK: New evidence based on panel data," Journal of Public Economics, Elsevier, vol. 56(2), pages 257-272, February.
  5. Weisbrod, Burton A. & Dominguez, Nestor D., 1986. "Demand for collective goods in private nonprofit markets: Can fundraising expenditures help overcome free-rider behavior?," Journal of Public Economics, Elsevier, vol. 30(1), pages 83-96, June.
  6. Rose-Ackerman, Susan, 1982. "Charitable Giving and "Excessive" Fundraising," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 193-212, May.
  7. Andreoni, James, 1988. "Privately provided public goods in a large economy: The limits of altruism," Journal of Public Economics, Elsevier, vol. 35(1), pages 57-73, February.
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Cited by:
  1. Baris K. Yörük, 2009. "Do Fundraisers Select Charitable Donors Based on Gender and Race? Evidence from Survey Data," Discussion Papers 09-01, University at Albany, SUNY, Department of Economics.
  2. Scharf, Kimberley Ann & Smith, Sarah L., 2010. "Rational Inattention to Subsidies for Charitable Contributions," CEPR Discussion Papers 7760, C.E.P.R. Discussion Papers.
  3. Scharf, Kimberley Ann, 2010. "Public Funding of Charities and Competitive Charity Selection," CEPR Discussion Papers 7937, C.E.P.R. Discussion Papers.
  4. Buraschi, Andrea & Cornelli, Francesca, 2002. "Donations," CEPR Discussion Papers 3488, C.E.P.R. Discussion Papers.
  5. James Andreoni & A. Abigail Payne, 2011. "Crowding-Out Charitable Contributions in Canada: New Knowledge from the North," NBER Working Papers 17635, National Bureau of Economic Research, Inc.
  6. Sonia Manzoor & John Straub, 2005. "The robustness of Kingma’s crowd-out estimate: Evidence from new data on contributions to public radio," Public Choice, Springer, vol. 123(3), pages 463-476, June.
  7. Primož Pevcin, 2012. "Analysis of Cross-Country Differences in the Non-Profit Sector Size," Prague Economic Papers, University of Economics, Prague, vol. 2012(2), pages 186-204.
  8. Björn Frank & Kurt Geppert, 2002. "Corporate Donations to the Arts: Philanthropy or Advertising?," Discussion Papers of DIW Berlin 307, DIW Berlin, German Institute for Economic Research.

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