The impact of public funding on the different types of private contributions

• DOI: http://doi.org/10.1111/faam.12215
• Author: Inigo Garcia‐Rodriguez,M. Elena Romero‐Merino,Pablo Andres‐Alonso
• Published date: 01 February 2020
• Date: 01 February 2020

Received: 26 June 2018 Revised: 25 February2019 Accepted: 2 May 2019

DOI: 10.1111/faam.12215

ORIGINAL ARTICLE

The impact of public funding on the different types

of private contributions

Pablo de Andres-Alonso1Inigo Garcia-Rodriguez2

M. Elena Romero-Merino2

1Department of Finance and Marketing

Research, Autonoma University of Madrid,

Madrid, Spain

2Faculty of Economics and Business

Administration,Department of Economy and

Business Administration,University of Burgos,

Burgos, Spain

Correspondence

InigoGarcia-Rodriguez, Faculty of Economics

andBusiness Administration, Department of

Economyand Business Administration, University

ofBurgos, C/ Parralillos s/n 09001 Burgos, Spain.

Email:inigogr@ubu.es

Fundinginformation

Ministeriode Economía y Competitividad,

Grant/AwardNumber: Project ECO2017-85356

Abstract

We analyze the effect of public funding on private contributions to

67 nongovernmental development organizations (NGDOs) in Spain

from 2006 to 2011. Previous literature gives theoretical explana-

tions for both the crowding-in and the crowding-out effects, while

the empirical evidence presents different realities. In this study, we

find a partial crowding-out effect (€1.00 of public funding reduces

private contributions by €0.43) by using generalized method of

momentsestimators. However, this overalleffect does not hold when

analyzing the influence that different sources of public funds haveon

each type of private contribution.

KEYWORDS

crowding-in, crowding-out, nonprofit organizations, private contri-

butions, public funding

1INTRODUCTION

Why do people donate? How do they choose the nonprofit organizations (NPOs) to which they provide financial aid?

The study of donors’ intrinsic motivations to commit their money to certain organizations (or programs) has helped

NPO managers understand the behavior of current private donors (Wang& Ashcraft, 2014). Although the literature is

increasingly considering different factors that affect the volume of donations, we focus on a relationship that has been

extensivelystudied, namely, the effect that public funding has on private contributions.

Froman academic perspective, this literature is related to the description of NPOs’ origins. There are many theories

about NPOs’ origins and the donors’ motivations to extend aid to a particular cause, but not all of them are appropri-

ate in the context of the NPO type that we analyze in this study,namely, nongovernmental development organizations

(NGDOs). First, the “contract failure theory” (Hansmann, 1980) explains NPOs’ existenceas a mechanism that miti-

gates the appearance of opportunistic behaviors because of the nondistribution constraint. This theory could be used

to explain the existence of NGDOs, whose supervision is quite difficult because these organizations do not offer ser-

vices to the same people who finance them, and they provide such services in other countries. Similarly,the “govern-

ment failure theory” (Weisbrod, 1975) can also be applied to NGDOs because theyare partially financing a public good

Financial Acc & Man. 2020;36:33–49. wileyonlinelibrary.com/journal/faam c

2019 John Wiley & Sons Ltd 33

34 ANDRES-ALONSOET AL.

(the improvement of the living conditions in other countries) that national governments do not provide completely

(according to the donors’ expectations). Finally, according to the “voluntary failure” theory (Salamon, 1987a,1987b),

the initiative to provide certain goods or services to the population is driven by citizens through NPOs, but the final

aim of these citizens is to gain the government’s commitment as well as public funding for these goods or services.

Therefore, according to this approach, if NGDOs receive more public funding to reach their aims, we would expect a

reduction in their private support until such support finally disappears. This outcome is what some authors havecalled

the crowding-out effect of public aid: the reduction in private contributions caused by an increase in public funding. In

this context, we can refer to campaigns that struggle to increase the state’s commitment to this aim, requesting that

national governments spend 0.7% of the annual national income on foreign aid.1

Nevertheless, we observe in the literature that there existcontradictory arguments about the consequences of an

increasein public funding of NPOs. The so-called crowding-out/in effect has been studied in different nonprofit subsec-

tors and countries and the results vary,suggesting the importance of considering the context. There are some studies

about NGDOs that, contrary to what we have just argued, show a positive relationship between public funds and pri-

vate contributions (crowding-in effect) (Arulampalam, Backus, & Micklewright, 2015; Herzer & Nunnenkamp, 2013;

McCleary & Barro, 2008). These results are not necessarily incongruent with our arguments, but they may show a

different type of donor behavior. Additionally,these results can be explained by the fact that the direct action of the

government is sometimes limited by ideological or bureaucratic reasons and, therefore, the state becomes a source

of financial support for NGDOs that continue to supply public goods to the population through a more flexible way

compared with the state itself (Salamon, Sokolowski, & Anheier,2000). Considering these different perspectives, we

investigate the above questions by testing the conventional but opposing hypotheses in adifferent context, namely,

that of the nonprofit subsector of international cooperation and development in Spain.

This is an especially worthwhile subsector in which to analyze the crowding-out/in effect because, in addition to

the above arguments, a portion of the Official DevelopmentAssistance2(ODA) is channeled directly via NGDOs. Con-

sequently, these NGDOs are highly dependent on public funds from different levels of public administration (local,

regional, national, European, and international), and they each have their own calls for financial support and singu-

lar accountability controls. Additionally, they havediverse private donors with different motivations and fundraising

costs. For all these reasons, we are interested and motivated to conduct a detailed analysis of the relationship among

all these different sources of funds.

This study makes severalcontributions to the literature. First, we disaggregate both public and private funding into

their different sources (not considering public or private funds, respectively, as a whole), obtaining different effects

depending on which level of public administrationor which category of private contribution is analyzed. Whereas pre-

vious studies have already disaggregated public funding, the consideration of different types of private contributions

had only been suggested.

Second, we use a sample of Spanish NGDOs from 2006 to 2011 totest our model of crowding-out/in, that is, in a dif-

ferent context. Wefind a general crowding-out effect (€1.00 of public funding reduces private contributions by €0.43).

This period is particularly relevant because even though the financial and economic crisis began at the end of 2007,

the ODA kepton rising until 2010, when it was abruptly reduced. Moreover, this subsector presents a unique scenario:

numerous social campaigns have been calling for an increase of ODA up to 0.7% of the national income; however,this

level has never been achieved in Spain.3Furthermore,previous analyses have mainly focused on NPOs in the United

States; as such, samples from Europe are less frequent.

This article is organized as follows. We begin with a brief review of the literature onthe impact that public funding

has on private contributions. Then, we describe the sample, data, and methodology. Next,we explain both the model

and the variables we need to test the sample. Then, we carry out the empirical analysis and present the results. We

finish the study by discussing our results and presenting the main conclusions.