Crowding out Both Sides of the Philanthropy Market: 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 fund-raising of the charities who, after getting the grant, reduce efforts of fund-raising (fund-raising crowd out)? This is the first paper to separate these two effects. Using a panel of almost 3100 charities, we find that crowding out is significant, at about 56 percent. Most of this crowding out is due to reduced fund-raising. We estimate that 68 percent of crowd out is from reduced fund-raising, and only 32 percent from the classic 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. JEL Classification: H00, H32, H50 * Andreoni: Department of Economics, University of California, San Diego (email: [email protected]); Payne: Department of Economics, McMaster University, KTH 426, Hamilton, ON L8S 4M4 Canada (email: [email protected]). This research was supported by grants from the National Science Foundation, from the Social Sciences and Humanities Research Council of Canada, the Canada Foundation for Innovation, and the Ontario Innovation Trust. We would also like to thank the Urban Institute for providing us with access to the IRS 990 data set. We’re grateful to Justin Rao for helpful comments.