Does the government crowd-out private donations? New evidence from a sample of non-profit firms

During the 1980s, government grants to non-profit organizations declined dramatically and the price of private donations increased. Given there are different costs associated with government grants and private donations to non-profits, it is important to study the relationship between these two sources and determine whether government grants `crowd-out' private donations. I take a fresh look at the issue of crowd-out and improve upon the literature by exploiting a panel data set that links private donations to non-profit firms with the government grants they received. I study 430 non-profit shelter, human services, and other similar types of organizations that were in operation between 1982 and 1992. I find private donations to these non-profits effectively do not change with changes in government grants after controlling for firm heterogeneity and political and economic factors under an OLS specification. In a 2SLS specification, after controlling for possible endogeneity of the government grants the estimated crowd-out is significantly different from zero and one dollar; on average, the estimated crowd-out is ∼50 cents.