Do Government Grants to Private Charities Crowd Out Giving or Fund-raising?
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Do Government Grants to Private Charities Crowd Out Giving
or Fund-raising?
By JAMES ANDREONI AND A. ABIGAIL PAYNE*
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. (JEL H00, H32, H50)
When the government makes a grant to a natural question that falls between these two
private charitable organization, does it displace literatures, namely, what is the behavioral re-
private giving? This is one of the fundamental sponse by charitable fund-raisers to receiving a
policy questions in public finance, and much government grant? Do they increase or decrease
theoretical and empirical research has been de- fund-raising efforts? If they decrease these ef-
voted to understanding the relationship between forts, perhaps this behavioral effect by fund-
private donations and government funding. The raisers, rather than a direct behavioral response
hypothesis underlying these studies is that giv- by individuals, could be responsible for the
ers, who are also taxpayers, will use their tax- crowding out observed. In other words, could
financed donations as a substitute for their grants to charities be crowding out the fund-
voluntary donations, thus reducing the net ef- raisers rather than the givers?
fectiveness of the grants. This has been called We explore this question theoretically and
the crowding-out hypothesis.1 Recently, new empirically. The theoretical model examines the
research has begun to examine the role that role that fund-raising plays in attracting private
fund-raising plays on the solicitation and receipt donations and the effect that government grants
of donations by studying the theoretical struc- have on the incentives, in equilibrium, to raise
ture of fund-raising and the marginal effective- more donations. We predict that an increase
ness of fund-raising expenditures.2 There is a in government funding should decrease fund-
raising efforts of the organizations, and that this
alone could generate the incomplete crowding-
* Andreoni: Department of Economics, University of out that has been observed.
Wisconsin, 1180 Observatory Drive, Madison, WI 53706 We then examine this prediction with exten-
(e-mail: andreoni@wisc.edu); Payne: Department of Eco- sive empirical research. We analyze data on tax
nomics, McMaster University, KTH 426, Hamilton, ON
L8S 4M4 Canada (e-mail: paynea@mcmaster.ca). This re- returns of 534 social service organizations and
search was supported by grants from the National Science 233 arts organizations between 1982 and 1998.
Foundation and from the Social Sciences and Humanities These two types of charitable organizations dif-
Research Council of Canada. We are extremely grateful for fer in both the nature of the services they pro-
the diligent work of our research assistant, Anna Ivanova.
We would also like to thank the Urban Institute for provid-
vide and in their reliance on private donations
ing us with access to the IRS 990 data set.
1
For recent contributions see Richard Steinberg (1991);
Jyoti Khanna et al. (1995); Payne (1998, 2001); Cagla Andreoni (1998, 2001); Howard P. Tuckman and Cyril F.
Okten and Burton A. Weisbrod (2000). Chang (1998); Patrick Michael Rooney (1999); Richard
2
See, e.g., Susan Rose-Ackerman (1982); Steinberg Romano and Huseyin Yildirim (2001); John Straub (2001);
(1986, 1994); Weisbrod and Nestor D. Dominguez (1986); and Lise Vesterlund (2003).
792VOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 793
and government grants. The arts organizations, ferent from zero. A $1,000 increase in grants to
on average, rely more on private donations. arts organizations decreases spending on pro-
Average annual private donations in constant fessional services by $53, decreases the cost
dollars are $6.1 million whereas average gov- attributable to officers’ salaries by $21, and
ernment grants are $1.3 million; average fund- decreases the cost attributable to staff salaries
raising expenditures are $637,000. Grants to by $153. Hence, contributions to charities may
these organizations are likely to be tied to spe- indeed fall when they receive a grant, but our
cific events, such as an exhibit or performance. results suggest that the reason may lie with the
Social service organizations are quite different. charities’ fund-raising efforts, not solely with
They rely far more on government grants. Av- the givers.
erage annual private donations are $2.4 million, This paper is organized as follows. Next we
average government grants are $2.2 million, present our theoretical model, showing the equi-
and average fund-raising expenditures are librium response of charities to government
$360,000. Moreover, many grants to social ser- grants. Section II describes the data and Section
vice organizations often look quite similar to III sets out our empirical specification. Section
government contracts to serve certain needy IV presents the estimation and Section V pro-
populations. These organizations often have vides a conclusion and discussion of policy
well-staffed fund-raising offices to apply for implications.
and administer these extensive grants and con-
tracts. By considering very different structures I. Theoretical Model
of these two types of nonprofit organizations,
we can get a broader view of the questions at Models on crowding out have typically as-
hand. sumed that individuals have complete informa-
Our empirical results confirm the theory. tion on the menu of charities available and
First, we look at the effect of government grants express their demands for the public goods
on aggregate fund-raising expenditures. For the through their donations.3 In developing a theo-
arts organizations, under a two-stage least- retical model of fund-raising, therefore, one
squares specification, the results suggest an ad- must first ask why fund-raisers are necessary. In
ditional $1,000 in government grants decreases the model we present below, we appeal to an
fund-raising expenditures, on average, by $265, often-cited fund-raising technique called “the
suggesting an average decline of more than 50 power of the ask.” That is, individuals and char-
percent. The results for the social service orga- ities alike report that givers give primarily be-
nizations, in contrast, suggest that $1,000 in cause they are asked. Stated differently, givers
government grants decreases aggregate fund- seem to have latent demands to donate. Until
raising expenditures by $54, suggesting an av- they are asked, this demand goes unexpressed.
erage decline of less than 35 percent. Second, The model we present is based on models of
we disaggregate fund-raising expenditures into advertising that reduce or eliminate prohibitive
three areas: fees paid to professional fund-raising search costs. In these models, when a salesper-
services, salaries of the organization’s officers son calls or sends a solicitation, the search costs
devoted to fund-raising, and other fund-raising are eliminated and the purchase is made. In our
staff and salaries. Looking at these three types framework, individuals who may have “always
of expenditures separately underscores the wanted to donate” but “didn’t know the ad-
overall effect found for the arts organizations dress” will be able to donate when solicited by
and the social service organizations for expen- the charity.
ditures devoted to professional fund-raising and Suppose that charities differ qualitatively in
the fund-raising salaries of staff. A $1,000 in- the services they provide. For instance, one
crease in grants to social service organizations group that serves disaster victims may focus on
decreases spending on professional services by providing more food than medicine and another
$19 and decreases the cost attributable to staff
salaries by $11. The effect of grants on the
salaries of the organization’s officers devoted to 3
See, for instance, Theodore Bergstrom et al. (1986),
fund-raising is not statistically significantly dif- and Andreoni (1988).794 THE AMERICAN ECONOMIC REVIEW JUNE 2003
may put more emphasis on medicine than food. vate goods, and let y ij be i’s contribution to
Likewise, individuals differ in the quality of charity j, where y ij ⱖ 0 for all i and j. Let j be
charity they prefer, with some preferring the the probability that an individual is solicited by
charity that provides more medicine and the charity j. We assume that higher costs more in
other preferring the charity that provides more fund-raising expenditures and that the marginal
food. cost is increasing. The costs of fund-raising are
Next, we assume that individuals face high designated as F j ( j ), where F⬘ ⬎ 0 and F⬙ ⬎
costs of finding the names and addresses and 0. Finally, let G j be the level of government
qualities of charities. Or, equivalently, they grants received by charity j. Thus, we can de-
have good intentions to give to the charity but fine the level of the charitable services provided
procrastinate in doing so.4 When a charity so- as
licits a contribution from an individual, it re-
冘y
duces this transaction (or procrastination) cost n
to zero for the giver. For the sake of modeling, (1) Cj ⫽ ij ⫹ G j ⫺ F j 共 j 兲.
we assume that individuals will not give unless i⫽1
they are solicited by the charity. If they are
solicited then they will give, but how much they We treat the quality indicator of a charity as
give will depend on how close the charity is to a real number located along a line segment of
their ideal quality. If they are solicited by more length one. Use L j 僆 [0, 1] to indicate the
than one charity, we assume that they give location of charity j. Individuals have a most
solely to the charity nearest to their ideal.5 Note favored quality, say L *i 僆 [0, 1]. If d(L *i , L j ) is
that we only preclude giving without being so- some distance function, then we assume that the
licited as a convenience for modeling purposes. utility an individual i gets from giving to charity
If some people give without being solicited, j will be increasing in ᐉ ij ⫽ 1 ⫺ d(L *i , L j ). In
then this is a windfall to the charity that can particular, we assume preferences are of the
easily be absorbed into our model. Fund-raising form
is needed as long as some people need to be
asked. (2) U i ⫽ u i 共x i , C j ; ᐉ ij 兲,
We assume charities move first in setting
their fund-raising levels; that is, by selecting the where utility exhibits the single crossing prop-
number of households to solicit. Charities move erty with respect to ᐉ ij :
simultaneously. Given the solicitations re-
ceived, givers move second and play a standard ⭸u i 共x, C; ᐉ ij 兲/⭸C ⭸u i 共x, C; ᐉ ik 兲/⭸C
Nash equilibrium giving game. ⱖ
⭸u i 共x, C; ᐉ ij 兲/⭸x ⭸u i 共x, C; ᐉ ik 兲/⭸x
Let x i be an individual’s consumption of pri-
if ᐉ ij ⱖ ᐉ ik .
4
This assumption has precedence in the literature on All else equal, this will imply that not only will
advertising, which often assumes that an individual will not
exercise their demand for a good unless they receive an
an individual prefer to give to a charity that is
advertisement from a seller. This can also be justified from closer to her ideal quality, but she will also want
models of procrastination (Ted O’Donoghue and Matthew to give more to it than one farther away.6
Rabin, 1999a, b), since a commitment to a charity may yield Fund-raising has two effects on donations.
a “warm-glow” to the giver before they actually mail the
check. Hence the benefits can flow before the costs are paid,
which is the prescription for procrastination identified by
6
O’Donoghue and Rabin. Notice also that (2) implies individuals only get utility
5
This assumption is for simplicity. A giver with convex from the charity they give to, not from the charities to which
preferences could be better off giving to a convex combi- they do not give, despite the fact that all charities are public
nation of all who solicit, but of course giving the most to the goods. If we assume preferences are separable in all chari-
charity closest to his/her ideal. All the results presented here ties, so that the marginal rate of substitution between the
follow with the more complex and realistic assumption. The charity one gives to and those one does not is independent
important aspect of the model is that more fund-raising by of the level of charity raised by the others, then all of the
one charity will reduce the effectiveness of fund-raising by results that follow extend to this case as well. Nonetheless,
other charities. this is an obvious avenue for generalization in later work.VOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 795
On the extensive margin, it increases the num- a given (1 , 2) we know that the number of
ber of people who give to the charity by increas- givers of type 1 to charity 1 will be n 11 ( i ,
ing the number of givers solicited. On the j ) ⫽ 1 n 1 and the number of type 2 givers to
intensive margin, it increases the average value charity 1 will be n 21 ( 1 , 2 ) ⫽ 1 (1 ⫺ 2 )n 2 .
of ᐉ among givers by matching them more Similarly, n 22 ( 2 , 1 ) ⫽ 2 n 2 and n 12 ( 2 ,
closely to their ideal quality, thus tending to 1 ) ⫽ 2 (1 ⫺ 1 )n 1 . Given these numbers, and
raise the amount given. We assume that, al- their own solicitations received, individuals will
though charities do not know the L* of any maximize utility (2) subject to the budget con-
individual, they know the proportions of each straint x i ⫹ p i y ij ⫽ m i , where 0 ⬍ p i ⱕ 1 is
type in society. Hence, we can think of fund- the price of a giving, which may be less than
raising as a random solicitation of individuals, one due to the charitable deduction from income
such as through mailings or telephone calls, and taxes, and m i is i’s after-tax income. Solving
so any individual is equally likely to be solicited this maximization, and assuming identical indi-
by the charity.7 viduals within types, it is easy to find equilib-
Next, what are the objectives of the fund- rium contribution levels of the form
raisers? If the providers of charity care about
producing charitable services, then they may be y *11 ⫽ f 11 共 1 , 2 ; G 1 兲
net revenue maximizers, choosing to maxi-
mize C, taking as given the fund-raising of y *21 ⫽ f 21 共 1 , 2 ; G 1 兲
other competing charities. On the other hand,
managers of charities may see fund-raising as a where ⭸f i1 /⭸ 1 ⱖ 0, ⭸f i1 /⭸ 2 ⱕ 0, and ⭸f i1 /
“necessary evil” that they need to endure to ⭸G 1 ⱕ 0 for i ⫽ 1, 2. Similar results hold for
provide services they value. That is, the objec- charity 2. That is, in equilibrium, own fund-
tives of the charity may be better described by a raising increases own revenues but decreases a
function V j ⫽ v j (C j , j ) where ⭸v/⭸C ⬎ 0 and competitor’s revenues. Likewise, higher G will
⭸v/⭸ ⬍ 0, so that charities may not choose the partially “crowd out” individual contributions.
level of fund-raising to maximize net revenues. We can turn next to the game among the
There is evidence this model of fund-raising charities. The total contributions received by
aversion may be more appropriate for many a charity will be increasing in its own fund-
organizations.8 We can simplify this expression raising and decreasing in the fund-raising of the
by assuming that fund-raisers maximize competing charity. Thus, we assume that each
charity will maximize
V j ⫽ C j 共 j 兲 ⫺ s j j
(3) V j ⫽ C j 共 j , k ; G j 兲 ⫺ s j j ,
where s j ⱖ 0 represents the disutility to the
charity managers of engaging in fund-raising. where C j ( j , k ; G j ) is the equilibrium out-
To simplify the exposition, assume there are come of the subgame among givers. This will
only two charities, 1 and 2, and two types of lead to best-reply functions by the charities of
individuals. For the n 1 type 1 individuals ᐉ11 ⫽
1, and for the n 2 type 2 individuals ᐉ22 ⫽ 1. For *j ⫽ *j 共 k ; G j 兲,
with ⭸ *j /⭸ k ⬍ 0, and ⭸ *j /⭸G j ⱕ 0.
7
This is, of course, a simplification. We could alterna- These derivatives of the best-reply function
tively assume that each individual is targeted by the charity
to be solicited in a certain order and that this ordering is
can be gleaned from a total differentiation of
chosen strategically as well. As long as there is a set of (3). Note that
givers that the charity is competing over, which is likely
given incomplete information on donor preferences, adding ⭸ *j ⭸ 2 C j /⭸ j ⭸ k
this assumption would only complicate the analysis without ⫽⫺ .
providing any additional richness to our predictions. ⭸k ⭸ 2 C j /⭸ 2j
8
Among other evidence, many charities appear not to be
net-revenue maximizers. See Weisbrod (1988, 1998) for By the second-order conditions on maximizing
more discussion. (3), the denominator above is negative. What796 THE AMERICAN ECONOMIC REVIEW JUNE 2003
about the numerator? Recall that has two
effects. First is the extensive margin, by bring-
ing people into giving that otherwise would not
give, and second is the intensive margin, in
moving givers from the other charity to their
more favored charity. As the other charity so-
licits more, the extensive margin will become
less important. As it becomes more likely that
any one person is solicited by the other charity,
it becomes less likely that they will give to your
charity. Hence, any solicitation is less produc-
tive. Therefore, ⭸ 2 C j /⭸ j ⭸ k ⱕ 0 and ⭸ *j /
⭸ k ⬍ 0. We will also assume that ⫺1 ⬍
⭸ *j /⭸ k . This is similar to the types of stability
conditions often invoked in duopoly models.
These assumptions lead to the existence of a
unique subgame-perfect Nash equilibrium. This
is illustrated in Figure 1.
It is also easy to see that ⭸ *j /⭸Gj ⱕ 0. In FIGURE 1. EQUILIBRIUM IN A MODEL OF FUND-RAISING
particular, by total differentiation we know that
raising is less productive after the grant, the
d *j ⭸ 2 C j /⭸ j ⭸G j charity will reduce , leading to a decline in
⫽⫺ . giving. Will the charity ever reduce so much
dG j ⭸ 2 C j /⭸ 2j
that total C after the grant is lower than it was
Since individuals will be “crowded out” by gov- before the grant? The answer is no, and can be
ernment grants, we know that when they are seen with a revealed-preference argument. In
solicited they will give less when G is higher. particular, it would have been possible for the
Hence, ⭸ 2 Cj/⭸ j⭸Gj ⬍ 0 and d j*/dGj ⱕ 0. charity to put less effort into fund-raising before
This yields Proposition 1. the grant, thus raising less charity, which it did
not choose. So given an opportunity to get at
PROPOSITION 1: As government grants to a least as much C with less effort , the charity
charity increase, fund-raising efforts by that will surely take it. Hence, government grants
charity will decrease. will be incompletely crowded out in the pres-
ence of fund-raising. This gives us the follow-
This proposition is also illustrated in Figure ing proposition:
1. Here G⬘1 ⬎ G 1 and the best-reply function for
firm 1 shifts toward the origin.9 Will crowding PROPOSITION 2: If the government increases
out be complete or incomplete? Suppose that its grant to a charity, the total level of charita-
the charity kept its fund-raising constant in re- ble services will always rise, although not by
sponse to a government grant. Then, because the full amount of the grant. This is due to a
the grant is partially paid for by those who do combination of reduced fund-raising and clas-
not give to the charity, there will be an income sic crowding-out.
effect that will increase the total supply of the
public good (see Bergstrom et al., 1986). We Note that we have assumed that there is no
just saw, however, that since marginal fund- “warm-glow” from giving (Andreoni, 1989,
1990). All the results generalize, however, to an
assumption of impure altruism in which people
9
If we were to add the realistic assumption that there is give partly for the private pleasure of giving.10
increasing disutility to fund-raising by the charitable orga-
nization (since they prefer spending time providing the
charitable services than fund-raising), this shift would be
10
accelerated. Hence, the greater this increasing disutility, the Here we can see that the strategic responses of char-
more fund-raising will decline as grants go up. ities to government grants could lead to crowding-out evenVOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 797
Finally we turn to the issue of what deter- tions. Government grants include grants re-
mines government grants. To complete this ceived from all levels of government, excluding
model we would need to present a formal po- reimbursements for services provided by the
litical model of democracy and policy forma- nonprofit under a government contract.13
tion, such as Timothy Besley and Stephen Coate The organizations have been classified in the
(1997). In such a model the political process National Taxonomy of Exempt Entities. We
would suggest that charities that are more in constructed two unbalanced panel data sets for
favor of the electorate are more likely to receive organizations sampled by the IRS for more than
government grants. Given the greater demand, three years located in the 48 contiguous United
they are more likely to engage in fund-raising. States. The first data set covers the following
Hence, there should be a strong correlation be- arts organizations: art museums, other types of
tween G j and ⌺ i y ij and F. This means that G, museums, performing arts groups (theater,
while exogenous to any one giver, is endoge- dance, etc.), and music groups.14 The second
nous to the equilibrium level of C in the econ- data set covers social service organizations that
omy. This simultaneity will be a factor in the are concerned with: family or children, poor or
empirical work. homeless, elderly or disabled, crime or delin-
quents, employment issues, the environment,
II. Nonprofit Data Set and other types of human services and housing-
related services.15
The data on nonprofit revenues and expenses We picked these two groups of organizations
come from federal tax returns filed by IRS Sec-
tion 501(c)(3) organizations for the period 1982 13
These types of payments are reported on a nonprofit’s
to 1998 (excluding 1984).11 Representing the tax return under program service revenue. Program service
largest part of the nonprofit sector, 501(c)(3) revenue, however, is not limited to payments by the gov-
nonprofits are those organizations whose pur- ernment; it covers any payment received by the nonprofit
poses are religious, charitable, educational, sci- for the services provided.
14
entific, or related to public safety testing.12 The The organizations include those classified under the
2-digit NTEE codes of A5 and A6. We exclude, however,
tax returns identify the amount the nonprofit those organizations classified under the 3-digit codes of A61
received in private donations, government and A6E. The organizations classified at A61 are perform-
grants, and fund-raising expenditures for the ing arts centers which may or may not identify the entire
year for which the return was filed. Private funding received by the organization to conduct a perfor-
mance at the center. For example, the Lincoln Center for
donations may come from individuals, estates, Performing Arts in New York is treated as one organization,
corporations, and/or other nonprofit organiza- whereas the music society which is housed within the center
is treated as a separate organization. As such, the tax return
for the music society may not fully reflect the support the
organization receives given it benefits from being housed
if people care only for a warm-glow and, as a result, would within the Lincoln Center complex. The organizations clas-
not substitute involuntary for voluntary gifts. If the charities sified as A6E are performing arts schools, which represent
dislike the act of fund-raising, then the income effect of a a type of nonprofit organization that is distinctly different
government grant means they can reduce the unpleasant from the arts organizations studied. By focusing on the
fund-raising efforts. organizations classified as A5 or A6, we excluded organi-
11
The data may be obtained from the Urban Institute’s zations such as professional societies, historical societies,
National Center for Charitable Statistics. For a given year, cultural organizations, arts councils, film, video, radio and
the returns are for firms whose accounting period ended other media organizations, and commemorative events
between November of that year and October of the follow- organizations.
15
ing year. The sample is stratified based on the asset size of The organizations include those classified under the
the nonprofits. Most of the returns tracked are for nonprofits 1-digit NTEE codes of C, I, J, K, L, P, and S. We exclude
with assets that exceed $500,000. For each year, IRS ran- those organizations with the code of less than 19 (e.g., C01
domly sampled the nonprofit firms within each asset level. to C19, I01 to I19) because these organizations include such
As IRS’s budget for this study increased, the number of things as professional societies, management and technical
nonprofit organizations tracked for a given year also in- assistance, research institutes, and specific fund-raising
creased. Data for 1984 were not collected for budgetary organizations. Thus, their missions are not geared towards
reasons. directly providing services. We also exclude organizations
12
An organization is required to file a tax return if its classified as P86 or P87. These organizations represent
annual gross receipts are greater than $25,000 and it is not institutes for the blind (P86) and the deaf or hearing im-
a religious organization. paired (P87).798 THE AMERICAN ECONOMIC REVIEW JUNE 2003
for several reasons. First, they represent differ- tax return, a nonprofit is not taxed on revenues
ent types of charitable goods and services inso- raised primarily for the goods and services it
far as the sectors of the population served. As provides. Thus, charitable organizations, rela-
such, the type of private donor attracted to giv- tive to for-profit organizations, are treated dif-
ing to these different goods may also differ. ferently by the IRS. In studying the returns, the
Second, the reliance on government funding most incongruous aspect we discovered with
and private donations differs across these types respect to the reporting of donations, grants, and
of organizations. Third, given the structure of fund-raising expenses, was that some organiza-
the arts organizations in the United States, these tions consistently reported positive private do-
organizations are more likely to be less multi- nations but no fund-raising expenses.
dimensional in their missions than many of the Third, as with any data set, there are anom-
social service organizations. For example, a alies in the data that must be addressed. Given
dance troupe is concerned about performing the purpose of our study, we are interested in
dance and creating new dance pieces for the studying organizations that exhibit positive pri-
dance troupe to perform. A given social service vate donations, fund-raising expenditures, and
organization may provide several types of ser- government funding during the sample period.
vices such as providing food, shelter, and some We, therefore, used the following rules to ex-
level of community reintegration for the home- clude organizations from the sample (followed
less. Although all three services are comple- sequentially):16
mentary, the sources of funding for each of
these services may be different. For example, 1. All organizations with three or fewer
in the area of social services, the government years of observations in the sample (236
has become more involved in contracting out arts organizations; 3,169 social service
government-provided services to nonprofit and organizations).
other types of organizations. Thus, one of the 2. All organizations that report zero gov-
activities for a social service organization may ernment grants for all years for which
involve performing services under a govern- the organization is in the sample (61
ment contract that may be more regulated than arts organizations; 1,662 social service
the services that would be provided if the orga- organizations).
nization received a government grant. 3. All organizations that report zero private do-
As other authors have found, the IRS sam- nations for all years for which the organiza-
ple of nonprofit tax returns requires extensive tion is in the sample (0 arts organizations;
data cleaning. There are four major reasons 200 social service organizations).
for this need. First, there are many zeros 4. All organizations that report zero fund-
reported in the measures of interest. Given we raising expenditures during the sample pe-
are incorporating organization fixed effects in riod (24 arts organizations; 545 social
the regression specification, it is important to service organizations).
have measures that change over time for each 5. All organizations that have three or more
organization as we will be measuring the av- occurrences of reporting a zero fund-raising
erage within effect across the organizations. expenditure and positive private donations in
Moreover, we are interested in studying two consecutive years in the sample or report
those organizations that actively seek private three consecutive years of reporting a zero
donations and government grants as well as fund-raising expenditure and positive private
report the expenditures associated with
fund-raising.
Second, there are divergent accounting prac- 16
We also excluded organizations that are a national
tices among organizations that raise concern chapter of local organizations. We identified these organi-
about the comparability of the tax returns. This zations by searching for the word “national” or “America”
stems from the fact that there is extensive het- in the name. We then confirmed these organizations were
the national chapter of local organizations by reviewing
erogeneity in the size and level of professional- their mission statements as obtained from their web sites.
ism in charitable organizations. This also stems We include in the analysis, however, organizations that may
from the fact that despite a requirement to file a have a national scope in their mission.VOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 799
TABLE 1—SUMMARY STATISTICS
Number of Number of Mean Standard
firms observations ($1,000s) deviation CV Median 75th percent
Arts organizations 233 2,417
Fund-raising expenditures 636.9 950.4 1.49 358.8 800.5
Professional fund-raising 157 1,667 48.3 132.5 2.74 0.0 34.3
Officers’ salaries toward 114 1,276 28.9 56.2 1.95 0.0 33.9
fund-raising
Others’ salaries toward 212 2,280 253.0 310.0 1.23 164.9 336.7
fund-raising
Private donations 6,102.7 11,032.5 1.81 2,770.8 7,218.0
Government grants 1,256.3 3,065.3 2.44 323.6 992.6
Program service revenue 4,539.1 7,794.0 1.72 1,487.4 5,333.8
Donations ⫹ grants 7,359.0 12,408.9 1.69 3,509.9 8,844.7
Donations ⫹ grants ⫹ service 11,898.1 17,763.9 1.49 6,099.3 14,743.6
Social service organizations 534 4,954
Fund-raising expenditures 359.7 1,059.6 2.95 104.2 313.4
Professional fund-raising 267 2,720 31.4 139.2 4.44 0.0 4.0
Officers’ salaries toward 247 2,565 20.1 54.1 2.69 0.0 17.0
fund-raising
Others’ salaries toward 451 4,383 128.4 289.9 2.26 51.1 131.1
fund-raising
Private donations 2,430.7 6,186.9 2.55 605.3 2,008.9
Government grants 2,156.6 8,232.8 3.82 145.0 1,150.8
Program service revenue 4,643.8 11,940.9 2.57 717.0 4,304.3
Donations ⫹ grants 4,587.3 10,409.0 2.27 1,431.8 4,005.8
Donations ⫹ grants ⫹ service 9,231.1 16,492.8 1.79 3,683.9 9,860.2
Notes: All dollars are constant ($1996) and reported in thousands. Private donations cover donations from all private sources;
government grants cover grants from all levels of government (excludes monies received from government contracts). CV ⫽
Coefficient of Variation ⫽ Standard Deviation/Mean.
donations (61 arts organizations; 321 social (1996 in the base year). For the arts organiza-
service organizations). tions, the average fund-raising expenditures
6. Miscellaneous organizations that display represent an average of 10 percent of average
some evidence of suspicious observations private donations.17 For the arts organizations,
(e.g., in the later years we can compare the average private donations received by the arts
values in the data set with the organizations’ organizations are $6.1 million; art museums re-
tax returns; in most instances the values ported the highest average amount. Average
do not match what was reported on the re- government grants are $1.3 million; art muse-
turn) (1 arts organization; 6 social service ums reported the highest average amount. Av-
organizations). erage fund-raising expenditures are $637,000;
music organizations reported the highest aver-
This leaves 2,417 observations and 233 organi- age amount. In addition to private donations and
zations for the arts data set and 4,954 observa-
tions and 534 organizations for the social 17
services data set. These organizations are lo- In recent years, it has become more common to use the
relationship between fund-raising expenditures and a non-
cated in the 48 contiguous states with the ma- profit’s total revenues as a measure of whether a nonprofit
jority of organizations located in New York, “efficiently” provides its goods or services. As such, this
California, Ohio, Illinois, Pennsylvania, Flor- could result in the nonprofit underreporting its fund-raising
ida, and Texas. expenditures to keep this ratio low. To the extent the non-
profit adopts a consistent method of reporting its fund-
Table 1 reports summary statistics for the arts raising expenditures during the sample period, the
and social services organizations, respectively. organization fixed effects will help to control for this
The amounts reported are in constant dollars anomaly.800 THE AMERICAN ECONOMIC REVIEW JUNE 2003
government grants, program service revenue the sum of private donations and government
plays an important role in the financing of these grants, in contrast, is $7.4 million for the arts
organizations. Unfortunately, the tax returns do organizations and $4.6 million for the social
not identify the sources of the program service service organizations. Thus, the arts organi-
revenue. Our speculation regarding the source zations rely more on private donations and
of these monies is that the bulk is derived from government grants than the social service or-
ticket sales and not from government contracts. ganizations. Third, the coefficient of variation
For the social service organizations, evalu- on the measures is greater for the social ser-
ated at the mean, private donations play a vice organizations suggesting a greater amount
slightly larger role in their funding than govern- of heterogeneity across the social service
ment grants. Evaluated at the median, however, organizations.18
private donations play a much bigger role than Figures 2 and 3 depict the average level of
government grants. Across all organizations, fund-raising expenditures, government funding,
the average program service revenue is quite private donations, and program service revenue
high, representing, on average, 54 percent more by year for the sample period for the arts and
revenue than government grants and 48 percent social service organizations, respectively.
more revenue than private donations. Given the Given fund-raising expenses are substantially
nature of the nonprofit organizations under lower than the other measures, fund-raising ex-
study, we speculate that a large percentage of penses are reported on a different scale (along
these revenues are derived from government the right vertical axis). For the arts organiza-
contracts. We also suspect that the organiza- tions, Figure 2, average private donations fell
tions that rely heavily on program service rev- slightly in the early to mid-1980’s. Subsequent
enue may offer several types of goods and to 1987, private donations grew, especially
services and that the goods provided using pro- post-1993. Government grants have remained
gram service revenue are complementary to the fairly flat. Fund-raising expenditures have also
goods provided using government grants and/or grown steadily over the sample period, at a rate
private donations. Thus, the role and source of that is similar to the rate of growth for the
program service revenue for the social service private donations.
and arts organizations appear to be different. For the social service organizations, Figure
Average private donations are $2.4 million; 3, at the beginning of the sample period, all four
human service organizations reported the high- measures were declining, reaching the lowest
est average amount. Average government grants average level around the time of the 1986 tax
are $2.2 million; community service organiza- reform. After the 1986 tax reform, average gov-
tions reported the highest average amount. Av- ernment grants and private donations increased
erage fund-raising expenditures are $360,000; slowly and similarly. The sharpest growth is
environmental organizations reported the high- seen in program service revenue, especially be-
est average amount. On average, fund-raising tween 1991 and 1996. For most of the period,
expenditures represent 15 percent of total pri- average fund-raising expenditures grew faster
vate donations. than government grants and private donations
Comparing the summary statistics for the arts but not as fast as program service revenue.19 For
and social service organizations, there are sev- both figures, there is no strong evidence that as
eral salient points. First, the emphasis on private government grants have increased over time,
donations or government grants is different for fund-raising expenditures have declined.
these organizations. Second, although the em- We have also collected data at the state level
phasis on funding sources is different across the
two types of organizations, the average total of
these three sources of revenues for the arts 18
The coefficient of variation, defined as the standard
organizations is slightly larger than the aver- deviation divided by the mean, measures the relative dis-
age for the social service organizations. The persion in the data.
19
Figures 2 and 3 illustrate a potential difference in the
average for the arts organizations is $11.9 reactions by donors and the government to the Tax Reform
million and the average for the social service Act of 1986 and/or other policy changes such as changes in
organizations is $9.2 million. The average of federal welfare policy.VOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 801
FIGURE 2. ARTS ORGANIZATIONS
AVERAGE FUNDING PER ORGANIZATION PER YEAR
FIGURE 3. SOCIAL SERVICE ORGANIZATIONS
AVERAGE FUNDING PER ORGANIZATION PER YEAR
to proxy the political, economic, and demo- Appropriations committees (Senate and House)
graphic conditions under which the organiza- representing the area in which the nonprofit is
tions operate. All measures are publicly located.20 The political measures proxy the
available from various government publica-
tions. The measures reflecting the political con-
20
ditions under which a nonprofit operates We hand collected data on the membership of the
identify the political party composition of the appropriations committees for both chambers of the U.S.
Congress. For the Senate, we use the state represented by
state legislature and U.S. Congress, as well as the Senator to identify whether a nonprofit organization
the political party of the state’s governor and the located within that state has a member on the committee.
number of members on the U.S. Congressional For the House of Representatives, we identify by state802 THE AMERICAN ECONOMIC REVIEW JUNE 2003
sentiment of the voters in a given state and are squares (OLS) and two-stage least-squares
expected to address the distribution of govern- (2SLS) framework.
ment funding across the organizations. The The parameter  captures the effects of gov-
state-level economic and demographic mea- ernment funding on fund-raising expenditures.
sures identify such things as per capita income, We allow government funding to be measured
the unemployment rate, the population, the in the same period as the fund-raising effort
percentage of the population between the under the assumption that there is a lag between
ages of 45 and 59, the percentage of the popu- seeking government funding and actually re-
lation between the ages of 60 and 64, and the ceiving the funding. Because we have a panel
percentage of the population over 65. These data set, we include organization and year fixed
measures are proxies of the need for the goods effects. The organization fixed effects are de-
and services provided by the organizations as signed to capture the time-invariant heterogene-
well as the potential for giving to these ity in the organizations such as their reputation,
organizations. age, type, and/or method of operation that af-
We also collected measures that identify the fects the collection of funding and the use of
level of government transfers to individuals or fund-raising expenditures. The year fixed ef-
nonprofit organizations. The individual trans- fects control for macro-level time-varying
fers reflect payments related to: retirement and shocks that affect all of the organizations
disability, Medicare, Medicaid, income mainte- similarly.
nance (SSI, AFDC, food stamps), unemploy- In addition to the above measures, we in-
ment insurance benefits, veterans benefits, and cluded various measures at the nonprofit orga-
federal education and training programs. The nization level to help control for time-varying
transfers to nonprofit organizations reflect the changes at the organizational level. For the arts
payments by the federal and state governments organizations we included three types of mea-
to nonprofit organizations. sures: program service revenue, the beginning
of the year value of investment securities, and
III. Empirical Specification dues and assessments. Program service revenue
represents revenue that is collected by the orga-
We use the data to test Proposition 1. We nization for services provided. This covers a
utilize the following empirical model: range of activities such as admission fees, sales
of products, and funding from government con-
(4) F ist ⫽ ␣ i ⫹ ␥ t ⫹  G ist tracts. The value of investment securities repre-
sents a measure of wealth of the organization
⫹ O ist ⫹ ⫹ Zst ⫹ it that is derived from activities unrelated to the
mission of the charitable organization. Dues and
where F is the real level of fund-raising expen- assessments represent the revenue received
ditures spent in year t by nonprofit i located in from “members” of the organization. If a mu-
state s, G is the real level of government grants seum provides special privileges for patrons
in year t received by the nonprofit, O is the that pay an annual fee, this would be included
vector of revenue and/or expenditure measures on the tax return as “dues and assessments.”
at the nonprofit level, and Z is the vector of For the social service organizations, we in-
economic, demographic, government transfers cluded the two measures of program service
to individuals, and/or political measures for the revenue and beginning of the year value of
state in which the nonprofit is located. We es- investment securities. Instead of including the
timate this specification under an ordinary least- measure of dues and assessments, we included a
measure reflecting payments made to individu-
als from the organization’s program service rev-
whether there is at least one member serving on the House enue. While there are various other time-
appropriations committee. In addition, we identified varying measures we could include in the
whether there is at least one member in the Senate or House
of Representatives serving on the appropriations commit- analysis, for the most part, the coefficient on the
tees that represent the states that are physically contiguous government measure does not change signifi-
to the state under study. cantly when other measures at the organiza-VOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 803
tional level are included in the regression. This officers would prefer to spend effort on the
is likely due to the fact that we are including the nonprofits services rather than on fund-raising.
organization and year fixed effects in the Hence, we expect this expense to decline as
analysis. grants are received. Third is the portion of over-
all salaries and wages allocated to fund-raising.
A. Measurement Issues If this item were measured accurately, we
would expect this also to decline as grants are
As other authors have noted, although the received. We fear, however, that this item may
data set we are using in this paper is rich given also include expenses related to maintaining a
the large number of firms we can study over “grants office” that also administers grants once
time and the ability to segregate the organiza- they are received. To the extent these activities
tions into types of goods provided, the data set are included in this measure the coefficient may
is not without problems. There are four poten- be positively biased.21
tial problems that we will address in our anal- A third issue concerns the fact that some
ysis. First is timing. The data are reported on a government grants may be in the form of a
yearly basis. The timing of government fund- matching grant, whereby the nonprofit organi-
ing, private donations, and the efforts expended zation is expected to raise funding from other
towards fund-raising, however, may not fall sources to qualify for the government funding
within the same one-year period. This raises the (or vice versa). Given the nature of the data set,
question of whether we should lag government we do not know if the government funding is
funding or modify the data such as taking a tied to the charitable organization receiving a
moving average of the measures. Although we matching grant. To the extent that a given non-
only report results using current dollars, the profit organization consistently receives match-
results are robust regardless of whether we use ing grants, the organization fixed effects would
a lag or a two-year moving average in govern- control for this type of phenomenon. In addi-
ment funding. tion, to the extent that there is a uniform switch
A second issue concerns the uses of the or- in grant awards by all government agencies
ganization’s fund-raising expenditures. To during the period under study, the year fixed
properly test the theory, the fund-raising expen- effects would control for this type of phenom-
ditures should only be used towards the collec- enon. If there are matching grants that vary over
tion of private donations or funding unrelated to time and within the firms, then the fixed effects
government grants. The reporting instructions will be of little use in this regard and the coef-
to charities, however, define fund-raising as ficient on the fund-raising expenditures will
“the total expenses incurred in soliciting contri- have a positive bias.
butions, gifts, grants, etc.” Hence, a nonprofit Fourth, given that fund-raising expenditures
may include the costs associated with applying are skewed towards zero, an OLS framework
for government funding as a fund-raising ex- may not be the best framework to use. We,
penditure or, worse, the costs of reporting and therefore, also use a Tobit specification to
complying with the conditions of the grants. If
this is the case, the coefficient on the fund-
raising measure in equation (4) will have a 21
To explore these issues further, we divided the data
positive bias. We can address this by looking into three groups: those observations for which there are
separately at the components of fund-raising positive private donations but zero government grants; those
costs reported by the charities. There are three observations for which there are positive government grants
but zero private donations; and those observations for which
main components. First are “professional fund- there are positive government grants and positive private
raising fees” which are payments to outside donations. On average, fund-raising expenditures are higher
organizations for conducting fund-raising or for the observations that report no government funding than
for consulting on fund-raising. These expenses for the observations that report no private donations. Fund-
most cleanly represent the notion of fund- raising expenditures are only slightly higher for the obser-
vations that report both positive private donations and
raising expenses intended in the theoretical government funding. Across all three groups of observa-
model. Second is the portion of officers’ salaries tions, the ratio of fund-raising expenditures to total revenues
allocated to fund-raising. We presume that the collected by the nonprofit is the same (0.01).804 THE AMERICAN ECONOMIC REVIEW JUNE 2003
TABLE 2—RELATIONSHIP BETWEEN FUND-RAISING AND GOVERNMENT GRANTS, OLS
Arts organizations Social service organizations
Dependent variable OLS Tobit OLS Tobit
Fund-raising expenditures (1) (2) (3) (4)
Government funding ($1,000s) 13.39 13.16 7.32 7.11
(5.50) (4.05) (2.73) (1.57)
Program revenue ($1,000s) 18.34 18.62 11.96 12.01
(6.15) (3.00) (3.05) (0.73)
Dues and fees ($1,000s) 212.06 213.01
(50.16) (16.58)
Investment securities 2.94 2.89 ⫺0.88 ⴚ0.90
(beginning of year, $1,000s) (0.95) (0.30) (0.86) (0.19)
Assistance to individuals ($1,000s) 5.16 5.06
(8.87) (7.77)
F-statistic on state economic measures 1.88 1.55 2.90 6.56
( p-value) (0.08) (0.16) (0.01) (0.00)
F-statistic on state political measures 2.31 1.85 2.53 2.28
( p-value) (0.03) (0.09) (0.02) (0.03)
F-statistic on state transfer measures 0.82 1.22 0.90 1.36
( p-value) (0.55) (0.29) (0.50) (0.23)
R2 0.8728 0.9194
Fixed effects Organization Organization Organization Organization
and year and year and year and year
Number of observations 2,417 2,417 4,954 4,954
Number of firms 233 233 534 534
Notes: All regressions incorporate organization and year fixed effects. All numbers in parentheses are robust standard errors
unless otherwise noted. A bold coefficient is significant at p ⬍ 0.05. Economic, political, and transfer measures are at the
state level. Economic measures: real per capita income, state unemployment rate, percent of population between 45 and 59,
percent of population between 60 and 64, percent of population over 65, and state population. Political measures: percent of
members in state upper legislature that are democratic, percent of members in state lower legislature that are democratic,
measure of political competition in state legislature, dummy variable equal to one if state governor is democratic, percent of
members in U.S. House of Representatives that are democratic, number of U.S. senators that are democratic. Transfer
measures: payments to individuals for retirement and disability, Medicare, Medicaid, income maintenance (e.g., SSI, AFDC,
food stamps), unemployment insurance, and veterans’ benefits.
control for this problem. We report the results unmeasured influences may be increasing both
for the Tobit specifications that are similar to government grants and fund-raising. To correct
the OLS specification. Overall, the coefficients for this positive bias we choose to use instru-
on the government funding measures are similar mental variables. In this section we first report
in the two specifications. As such, we do not results without controlling for endogeneity, and
report the results under the Tobit 2SLS then turn to results using a two-stage least-
specification. squares regression methodology.
IV. Estimation A. OLS and Tobit Regressions
In estimating equation (4) we expect to en- Table 2 reports estimates of equation (4) from
counter problems of endogeneity. In particular, the OLS regressions and the fixed-effects Tobit
if the services of an organization are in high specification for the arts and social service or-
demand, such as the Red Cross after a hurri- ganizations. In each specification reported, we
cane, we might expect demands for both private regressed fund-raising expenditures on govern-
and public contributions to be high. And, natu- ment grants, the other organization-level mea-
rally, if both demands are high, these organiza- sures, state political, economic, demographic,
tions should increase their pursuit of both public and government transfer measures, and year and
grants and private donations. In other words, organization fixed effects. In columns (1) andVOL. 93 NO. 3 ANDREONI AND PAYNE: DO GRANTS CROWD OUT FUND-RAISING? 805
(3) we report the results from an OLS specifi- sures. In the second stage, we use the predicted
cation. In columns (2) and (4) we report the level of government funding to measure .
results from the Tobit specification. In all of the In searching for a set of instruments, one is
specifications, we divided government funding interested in a set of measures that explain gov-
and the other organizational-level measures by ernment grants directly but not fund-raising. We
one thousand. Thus, the coefficient on govern- identified several potential sources of instru-
ment funding represents the dollar increase in ments. The first set of instruments measures the
fund-raising expenditures per $1,000 of govern- transfers to all nonprofit organizations by state
ment funding. and federal governments, measured at the state
Across all four specifications, the results sug- level. These measures help control for the size
gest that an increase in government funding of the government budget that has been spent on
increases fund-raising expenditures. On aver- nonprofit activities, thus proxy the size of the
age, a $1,000 increase in government grants pie for which a nonprofit organization com-
increases fund-raising expenditures by $7 for petes. The second set of measures identifies
social service organizations and $13 for arts whether the area in which the organization is
organizations. Using the mean of government located has a member on the United States
funding and fund-raising expenditures across all Senate and/or House of Representatives appro-
organizations, these coefficients represents an priations committees. In the U.S. Congress, the
average increase between 3 and 4 percent. appropriations committee is charged with de-
The results reported in Table 2 reflect the veloping the budget that must be approved by
estimation when organizational fixed effects are the entire Congress and the President. A mem-
included in the specification. If we do not in- ber on the committee, thus, has some influence
clude the fixed effects, the coefficient on the over the distribution of discretionary funding
government grant measure is very different for across the agencies. The third set of instruments
both the arts and social service organizations. measures total research funding to the universi-
For the arts organizations, the coefficient in the ties in the state from the National Institutes of
specification without the fixed effects is higher Health, lagged by one year. This measure iden-
(21.7), suggesting that the fixed effects help to tifies government resources that are being de-
control for reputational effects across the vari- voted to things other than the charitable
ous organizations. Interestingly, for the social organizations under study, thus, providing a
services organizations, the coefficient in the proxy for the level of resources that may be
specification without the fixed effects is lower available from the government for distribution
(1.2) and not statistically significantly different for purposes other than health research. The
from zero. This suggests that within the social measure also identifies the research intensity of
services organizations, there may be shocks that universities in a state with respect to health
affect government funding and private dona- research and, thus, providing a proxy for a level
tions to the organizations similarly for which of the population that may be more highly ed-
the other measures have not controlled in the ucated and, potentially, a patron of the arts.22
OLS specification. To test whether these measures are suit-
able instruments we looked at the results of
two tests. First, the F-statistic on the set of
B. Two-Stage Least-Squares Estimation instruments in the first-stage regression. This
As discussed above, there are several issues
that suggest the OLS results may be biased due 22
In earlier versions of this paper we considered addi-
to endogeneity or omitted variables in the spec- tional sets of instruments, described as follows: the dollars
ification. To address these issues, we estimate spent on hotel lodging within a state, a proxy for the level
equation (4) using a 2SLS specification. Under of tourism in the states; the amount of government grants to
2SLS, in the first stage, we predict the level of state arts agencies, a proxy for the level of government
funding devoted to supporting state arts agencies. Unfortu-
government funding based on a set of exoge- nately, these instruments were not that powerful in predict-
nous measures used as instruments that are not ing government funding in the first stage and so we did not
directly correlated with the fund-raising mea- explore these instruments further.You can also read
