Abstract: It is accepted that charitable donations are
partially crowded out by government grants. That is, people view grants as imperfect
substitutes for their own giving. At least, that’s the “demand side” of the
story. I take a look at Andreoni and
Payne (2003)[1]
and discuss their findings for the “supply side”, i.e. nonprofits. They suggest
the strategic response of non-profit firms is to reduce fund-raising efforts
after receiving a grant. This has important implications for the time-old “big
government giving/small government, private donations” debate and says,
essentially, you’re both right/wrong! (I’m drinking coffee, and currently my
glass is half full…everyone’s right)
I have just returned from the Southern Economics Association’s
annual conference, this year in New Orleans, and am bursting at the seams with
interesting stories (about a 50/50 split between Bourbon Street and the
Conference).
New Orleans is in itself an economic phenomenon; a cesspool
of behavioral anomalies, a sandbox for the study of market competition and consumer/firm interaction, and yes, a kiddie-pool-full-of-ky-jelly of altruism and
charitable giving. For example, my friend managed to donate a
dollar to a man raising money for a deaf persons’ music club (there may
actually be these clubs and I am very happy for the deaf community if they
enjoy such opportunities). The interesting part of this transaction is not the
irony of the organization, but that he gave to a “cause” simply because he was
asked and would have never sought out a deaf persons’ music group to donate to
it. I gave a dollar to a man who told me to eat pine needles to gain more
testosterone… but I’m a connoisseur of sorts. The other interesting point is
that since I saw my friend donate, I didn't feel the need to. His giving “crowded
out” my giving.
My reduced giving as result of my friends giving parallels
what goes on with government grants.[2]
The demand side response to an organization that receives “my tax dollars”, or
in many cases any other source of money, is to reduce my giving to them. However,
you can easily imagine that if the man had received a grant to fund his
organization he would likely not be on the street on a Saturday night asking
for $1.50 donations from a stumbling, scruffy bearded hippy and a v-neck
sweater touting mamma’s boy (both economists). So, our private giving would be
reduced, not because we saw the grant as a substitute, but because he never
asked us!
Androni and Payne (2003) explore the nonprofit response
empirically. They find that for arts organizations (like a music group or museum)
an additional $1000 in government grants would reduce fundraising expenditures
by $265 dollars. Additionally, the same size grant would only reduce social
service organizations fundraising expenditures by $54 (and negative responses
for others). They conclude that grants do
decrease fundraising expenditures, which in turn decrease private giving. Not
surprisingly, effect is larger for organizations who receive many of their
current revenues from private donations already and smaller for those who have
to fight harder for private funds.
So, maybe the argument for non-profit government grants
should not be over whether or not to
give them, but which organizations to give them to.
Lastly, there is a reason why a “hand grenade” is a weapon
and not a drink…
[1]
Andreoni, James and A. Abigail Payne. “Do Government Grants to Private
Charities Crowd out Giving or Fund-Raising?” American Economic Review, June 2003, 93(3), pp. 792-812.
[2]
The crowding out is incomplete. By incomplete, I mean that the reduction in giving
does not equal the amount in grants, so there is net gain... good news.
