Crowding‐Out and Fundraising Efforts

• Author: William Luksetich,Patricia Hughes,Patrick Rooney
• Published date: 01 June 2014
• Date: 01 June 2014
• DOI: http://doi.org/10.1002/nml.21102

Correspondence to: Patricia Hughes, St. Cloud State University, Economics Depart-

ment, SH386, 72 Fourth Avenue, South St. Cloud, MN 56301. E-mail: pahughes@

stcloudstate.edu

NONPROFIT MANAGEMENT & LEADERSHIP, vol. 24, no. 4, Summer 2014 © 2014 Wiley Periodicals, Inc 445

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21102

Crowding-Out

and Fundraising Efforts

The Impact of Government Grants

on Symphony Orchestras

Patricia Hughes,

1

William Luksetich,

1

Patrick Rooney

2

1St. Cloud State University , 2Indiana University

The crowding-out of private donations by government grants is

an integral element in designing an efficient method of financ-

ing nonprofit activity. This article looks at elements of crowd-

out, both the direct impact on donors and the indirect impact

caused by the response of nonprofits. We include both theoreti-

cal and empirical analyses of the reactions by donors and non-

profits to an increase in government funding based on data from

the League of American Orchestras’ annual reports from 2004

to 2007. To combat indirect crowd-out, renewed emphasis

should be placed on grant design; for direct crowd-out, theories

of collective action are appropriate.

Keywords: crowding-out, fundraising, donations, nonprofit

financing, symphony orchestras

AN IMPORTANT ISSUE ASSOCIATED with direct government fund-

ing of nonprofit organizations is the reaction of private

donors to the additional support. There are concerns that

government funding will “crowd out” private donations as indi-

viduals perceive less need for private support, thereby lessening the

impact of the grant. There is also the possibility that government

grants may increase private donations by providing prestige or

credibility to the organization or by requiring matching funds. Par-

ticularly for emerging or lesser-known organizations, government

funding requiring increased compliance and scrutiny may provide

446 HUGHES, LUKSETICH, ROONEY

Nonprofit Management & Leadership DOI: 10.1002/nml

validation of the organization’s effectiveness and reputation in the

community. An additional issue with direct government support is

the response of the nonprofit organization receiving the funding.

The source of funding for an organization will influence the pro-

gramming, marketing, and fundraising efforts of that organization.

Given that the theoretical models of crowd-out and crowd-in are

indeterminate, the empirical evidence becomes even more impera-

tive. The theories of nonprofit behavior and empirical evidence of

donor and organization behavior can be used to structure more

effective financing options and to better position the organization

financially in the face of policy changes.

The degree of crowd-out facing any organization depends on the

direct reaction of donors to the alternative funding and the indirect

reaction of donors based on the response of the nonprofit. The direct

reaction of donors is dependent on the substitutability of govern-

ment funding for donations, the complementarities of government

and private funding, the status afforded the organization receiving

the grant (which can be a signal of quality, thereby creating crowd-

in), the amount of “warm glow” that is derived from the act of giv-

ing, and/or the prestige that is created by the donations among one’s

peers and others, and other factors that arise as a direct response to

a change in government support. In addition, donors—at least at

higher levels—may be treated differently by the charity. For exam-

ple, charities may extend additional attention or benefits (or the

opportunity for such benefits) to donors often levels above certain

thresholds, such as the ability to buy preferred shares or to attend

VIP receptions and meet and mingle with the artists, athletes, and

other performers.

The indirect crowd-out is a result of the reaction of the non-

profit to a change in government grants that influences donations.

Nonprofit responses include the impact of government funding on

program output mix, commercial activity, and fundraising efforts. An

identification of the scope and source of crowd-out is an important

element in both policy design and nonprofit efforts in supporting

collective action. On the one hand, successful government funding

might lead to increased fundraising efforts (especially if matching

funds are required). On the other hand, if the nonprofit cares only

about sustaining its activities at a specified level, government fund-

ing may be associated with reduced fundraising efforts once the

budget has been met.

This article focuses on indirect crowd-out due to fundraising

efforts combined with the direct crowd-out due to changes in the

level of government funding. The theoretical and empirical models

of crowd-out assume that individuals are aware of the level of gov-

ernment funding and react to changes in the level of funding. Horne,

Johnson, and Van Slyke (2005) find very little knowledge on the

part of the donors as to the level of government support, however.

Even if donors knew the level of government funding, they indicated

There are

concerns that

government

funding will

“crowd out”

private donations

as individuals

perceive less need

for private

support.