Government grants crowd out fund-raising by charities.
In Is Crowding Out Due Entirely to Fundraising ? Evidence from a Panel of Charities (NBER Working Paper No. 16372), coauthors James Andreoni and Abigail Payne find that for every $1,000 in government grants a charity receives, contributions to the charity increase by an estimated $41, but the charity reduces fund-raising expenditures by $141. Because charitable fund-raising is highly profitable, with more than $5 raised for every dollar spent, this reduction in fund-raising expenditures reduces donations by an estimated $757. Overall, therefore, the response to the $1,000 grant is that "total contributions to the charity fall by $757, and the charity nets $385 including the money it saves on fund-raising."
The authors conclude that charities themselves are responsible for almost all of this crowd-out. And, although these findings are preliminary, they imply that government policy could remediate crowd-out by requiring that charities match "a fraction of government grants with increases in private donations" or require that "total spending by the charity must rise by 100 percent of the grant amount."
The estimates were made with data on charitable organizations' IRS 990 filings from the National Center for Charitable Statistics from 1985 to 2002. The 8,000 charities included in the sample were 501(c) (3) nonprofits operating in the continental United States in human and social services. Although there were substantial differences in dependence on private money relative to government money by charitable specialization, the average charity in the sample collected $787,000 in donations, $905,000 in government grants, and spent $91,000 on fund-raising.