Crowding Out! Does Funding from Government Reduce Other Donations?

A US study has found that charities significantly miss out on or receive reduced funding from other donors when a government gives a grant to a private charitable organisation.

In a working paper by the National Bureau of Economic Research in the US by James Andreoni from the Department of Economics, University of California, San Diego and Abigail Payne from the Department of Economics, McMaster University, Ontario, Canada, the researchers say such a finding could have important consequences for how governments structure grants to Not for Profits.

In research into what the US calls 'crowding out' – where donors don't give once they know the government has because they feel they have given through their taxes (classic crowd out), or where the charities who, after getting the grant, reduce their efforts to continue fund-raising (fund-raising crowd out) – the research into more than 8,000 charities has found that crowding out is significant, at about 72 percent.

The survey found that crowding out is due primarily to reduced fund-raising.

The researchers says that the 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.
The researchers found that their estimates show that through significant crowding out every $1000 grant reduces giving by $727.

They say another interesting finding of their analysis is that charitable fund-raising is highly profitable, with over $5 raised per dollar spent on fund-raising. While this number may strike economists used to profit maximisation as somewhat high, it is perfectly in line with ideals of best practices promulgated by charity watchdog groups and fund-raising professionals.

They say most important implication of their findings is that they open up a broader set of policy alternatives to the government. According to their estimates, a $1,000 increase in grants will result in classic direct crowding in of $45, reduced fund-raising expenditures of $137, and indirect crowding out due to reduced fund-raising of $772.

As a result of the $1,000 grant, total contributions to the charity fall by $727, and the charity nets $410 including the money it saves on fund-raising. If charities were required to maintain current fund-raising expenditures and practices, the charity would not only preserve its prior donations but also gain $45 in revenue resulting from a slight crowd-in affect of the grant.