Is crowding out due entirely to fundraising? Evidence from a panel of charities

When the government gives a grant to a private charitable organization, do the donors to that organization give less? If they do, is it because the grants crowd out donors who feel they gave through taxes (classic crowd out), or is it because the grant crowds out the fundraising of the charities who, after getting the grant, reduce efforts of fundraising (fundraising crowd-out)? This is the first paper to separate these two effects. Using a panel of more than 8000 charities, we find that crowding out is significant, at about 75%. We find this crowding out is due primarily to reduced fundraising. Depending on which types of organizations are included in the analysis, crowding out attributable to classic crowd-out ranges from 30% to a slight crowd-in effect, while fundraising crowd-out ranges from 70% to over 100% of all crowd-out. Such a finding could have important consequences for how governments structure grants to non-profits. Our results indicate, for example, that requirements that charities match a fraction of government grants with increases in private donations might be a feasible policy that could reduce the detrimental effects of crowding out.

Research Highlights
► Government grants to charities appear to reduce private donations.
► The grants also are correlated with a reduction in fundraising expenses by the charities.
► Fundraising is very productive, on average.
► The reduction in private donations seems to be due mostly to cutbacks in fundraising rather than direct crowding out.