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Heutel on crowding out, crowding in and charity

Abstract: A large literature examines the interaction of private and public funding of public goods and charities, much of it focusing on how public funding crowds out private funding: when governments increase funding of public goods, such as grants to charities, individuals may decrease voluntary contributions. This paper tests two new hypotheses. First, the crowding out effect could also occur in the opposite direction: in response to a change in the level of voluntary private contributions to a charity, the government may alter its level of funding. I show in a static model how crowding out can manifest in both directions, and that the order of movement between the individuals and the government affects the equilibrium level of private and government contributions. Second, with
asymmetric information about the quality of a public good, government funding may act as a signal about that quality. In this case, crowding in of private donations may be observed. I test for both of these phenomena using a large panel data set gathered from nonprofit organizations’ tax returns. I find evidence for both observations: government
grants respond to the level of private donations, and government grants crowd in private donations.

Garth Heutel, “Crowding Out and Crowding In of Private Donations and Government Grants,” unpublished paper. Available here.

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