Federal Grants Discourage Public Fundraising (and the growth of civil society?)

To have a vibrant and active charitable sector, government should not be too generous towards charities.  That seems to be the counter-intuitive lesson in Jeremy Thornton's recently posted "Flypaper Nonprofits:  Federal Grants and Nonprofit Expenditures." Here is the abstract:

The flypaper effect is a common anomaly observed when federal transfers to local governments stimulate local spending more than theoretically expected. The behavioral influence of grants is of particular concern for the nonprofit sector, where governments may wish to stimulate the production of social services. Recent research shows that grants can reduce private sector giving by causing a reduction in private fundraising activity. This study extends the work on federal grants to the charitable sector by examining the influence of incentive versus lump-sum style grants on the subsequent expenditures of recipient nonprofit firms. The paper draws detailed grant data from the Federal Assistance Award Data System (FAADS), which includes structural characteristics of the grant. Empirical results demonstrate that the structure of the grant matters a great deal. Incentive grants appear particularly effective at stimulating both additional fundraising activity and output of the firm.

 

The author tests whether government funding actually reduces or "crowds out" private charitable initiatives.  The research question is a good one to the extent civil society is viewed as a valuable alternative to top-down public action.  The value added by the charitable sector is manifested in the belief that "bottom up" or grassroots public action is distinguishable from top down public action.  The paper supports the assertion that to have a vibrant and active charitable sector, government should not be too generous.  This is a "macro" finding, since an individual charity might maintain its independence and distinction from government even if it receives government funding.  But too much government help might actually impede the growth of a vibrant civil society from a macro standpoint.  This seems a helpful paper for legislative policy makers.

dkj