Do Government Grants to Private Charities Crowd Out Giving or Fund-raising?

1. Do Government Grants to Private Charities Crowd Out Giving or Fund-raising? By James Andreoni and A. Abigail Payne

3. 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.

4. 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”

5. 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

7. 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)

8. Fundraiser Choice

9. 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

10. Why? • Represent different types of charitable goods and services in terms of the sectors of the population served • Difference in reliance upon government grants/assistance • Contrast of one-dimensional and multidimensional organizations

12. Data Cleaning • Many zeros reported in the measures of interest • Divergent accounting practices • Anomalies in the data *Says there are four but only three are listed…liar

13. 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

14. Empirical Specification

15. 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

17. 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

18. Two-stage Least-squares Estimation • Nervous that some unobservable variable exists that affects both G and F • Exclusion Restriction: • VGF

19. Potential Instruments • State-level transferscontrol 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

20. Social Service Organizations Arts Organizations

22. 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

23. 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

27. 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

28. 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