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

TLDR

Economists note that government grants to private charities rarely fully crowd out private giving, as donors view them as imperfect substitutes. The study investigates whether charities strategically reduce fundraising after receiving government grants. The authors use theoretical modeling and empirical analysis to examine how charities may cut fundraising in response to grants. Panel data analysis shows that government grants significantly reduce fundraising by arts and social service organizations, underscoring the need to consider charities’ behavioral responses in policy discussions.

Abstract

Economists have long observed that crowding out of government grants to private charities is incomplete. The accepted belief is that givers treat the grants as imperfect substitutes for private giving. We theoretically and empirically investigate a second reason: the strategic response of a charity will be to reduce fund-raising efforts after receiving a grant. Employing panel data from arts and social service organizations, we find that government grants cause significant reductions in fund-raising. This adds a new dimension to the policy discussions—analysts should account for the behavioral responses of the charity, as well as the donors, to government grants.