Do Government Grants to Charities Crowd Private Donations Out or In?

• Author: Andreoni, James
• Position: Research Summary

The basic hypothesis of crowding out is simple: Suppose individuals care only about their own private consumption and the charity's capacity to spend. In particular, they are indifferent to whether their own gift is voluntary or is involuntarily paid through taxes. As a result, any effort by policymakers to support this charity through more involuntary taxes would be met with equal reductions of voluntary gifts as donors work to reestablish their optimal total contributions. The net effect is that the government support for the charity completely crowds out private giving.

When confronted with more realistic theory, the basic hypothesis of crowding out quickly falls apart. First, complete crowding requires that donors be "pure altruists," that is, they engage in consequentialist reasoning. (1) If individuals have other motives for giving, such as private benefits of a "warm glow," or social motives like image or pride, then complete crowd-out may not hold. (2) Notice too that without impurely altruistic motives for giving there is also little use for fundraisers. Yet charities have very sophisticated and active fundraising operations. This leads us to questions such as: How does fundraising attract donations? What are the objectives of fundraisers? How do government grants affect both donors and fundraisers?

To examine these questions empirically, we first need to observe how donors respond to changes in government grants to the charities they support. In doing so, we must recognize an important source of bias. If there is a natural disaster, for example, then both the donors and the government will want to give more money for the Red Cross. This will make it appear that donations and grants to the Red Cross are positively correlated, thus biasing estimates toward crowding in.

In an important and early paper that recognized this bias, Abigail Payne estimated crowding out of about 50 percent; private charitable giving to an organization fell by about half the amount of government transfers to it. (3) Her paper, like the previous literature, did not treat charities as active participants in the market for donations. My recent empirical work on crowding out, much of it done jointly with Payne, aims to look directly at the mechanism of crowding out. We do this by including charities as strategic players in a game with donors and the government.

Strategic Charities

One key question related to the link between receipt of a government grant and a charity's total resources is how the charity's fundraising activities will respond. In particular, are charitable fundraisers net revenue maximizers? It is useful here to follow the distinction that non-profits make between continuing campaigns and capital campaigns.

The goal of continuing campaigns is typically to raise enough money to continue meeting the ongoing needs of the charity. This means that most charities will set a funding goal for the year and, roughly speaking, stop raising money when the goal is reached. Managers of such charities are said to be satisficers rather than maximizers. The consequence of this is that charities will stop actively raising money even though the marginal return of the last dollar of fundraising effort is still greater than a dollar. (4) Moreover, a common measure of the quality of a charity used by watchdog groups like Charity Navigator is "fund-raising efficiency," defined as the fund-raising expenses divided by total contributions. This may further discourage charitable organizations from pursuing revenue maximization.

Capital campaigns, by contrast, are typically about expanding the size or scope of the charity. They often...