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Impure Altruistic Model: Empirical Investigation of Crowding-out Effects of Private Donations by Government Grants Josephine Xu 20th March, 2012 Abstract A large literature examines the interaction of private and public funding of public good provision and charities. Most of it tests whether private donations are crowded out by pub- lic funding, or more specifically, government grants. This essay seeks to make the following two contributions to the existing literature. First, the impure altruistic model developed in the 1980s is confirmed by empirical testing through the use of tax data. Second, the existing hy- potheses of other determinants of donations, such as fund-raising expenditure, efficiency and programme service revenue, are tested using more recent data, which serves as an update to existing results. I test for crowding-out or crowding-in effects using a large panel data set gathered from charitable organisations’ tax returns. I find strong evidence that government grants do not crowd out private donations and the crowding-in effects found are small, con- sistent with the impure altruistic model. Regression point estimates indicate that fund-raising plays a significant role in determining the level of private donations, consistent with exist- ing literature. In the meanwhile efficiency and programme service revenues are generally not statistically significant. 1

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Page 1: Impure Altruistic Model: Empirical Investigation of ...Impure Altruistic Model: Empirical Investigation of Crowding-out Effects of Private Donations by Government Grants Josephine

Impure Altruistic Model: Empirical Investigation ofCrowding-out Effects of Private Donations by

Government Grants

Josephine Xu

20th March, 2012

Abstract

A large literature examines the interaction of private and public funding of public goodprovision and charities. Most of it tests whether private donations are crowded out by pub-lic funding, or more specifically, government grants. This essay seeks to make the followingtwo contributions to the existing literature. First, the impure altruistic model developed in the1980s is confirmed by empirical testing through the use of tax data. Second, the existing hy-potheses of other determinants of donations, such as fund-raising expenditure, efficiency andprogramme service revenue, are tested using more recent data, which serves as an update toexisting results. I test for crowding-out or crowding-in effects using a large panel data setgathered from charitable organisations’ tax returns. I find strong evidence that governmentgrants do not crowd out private donations and the crowding-in effects found are small, con-sistent with the impure altruistic model. Regression point estimates indicate that fund-raisingplays a significant role in determining the level of private donations, consistent with exist-ing literature. In the meanwhile efficiency and programme service revenues are generally notstatistically significant.

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Contents

1 Introduction 4

2 Literature Review 7

2.1 Theory development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2.2 Empirical Research and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3 Economic Framework and Theory 12

3.1 Determinants of private donations . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.2 Impure altruistic model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4 Data 16

4.1 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

5 Econometric Methods 19

6 Regression Results 24

6.1 Government Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

6.2 Fund-raising Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

6.3 Other Determinants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

6.4 Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

7 Conclusion 32

7.1 Contribution to existing literature . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

7.2 Limitations and possible future research . . . . . . . . . . . . . . . . . . . . . . . 33

7.3 Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

References 35

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Appendix A Data description 50

A.1 Sample Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

A.2 NTEE Major Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Appendix B First Stage Regression Results 52

Appendix C IV regression with interactions 54

Appendix D Replication of Okten and Weisbrod’s 2SLS regression 56

Figures

1 Trends in Number of Non-Profit Organisations . . . . . . . . . . . . . . . . . . . . 38

2 Aggregate Trends in Private Donations and Government Grants . . . . . . . . . . . 39

3 Source of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

4 Trends in Private Donations and Government Grants by Industry . . . . . . . . . . 41

Tables

1 Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2 Regression Results with Fixed Effects on Unbalanced Data Set . . . . . . . . . . . 43

3 Regression with Fixed Effects Results on Balanced Data Set . . . . . . . . . . . . 44

4 First Difference Regression by Industry on Unbalanced Panel . . . . . . . . . . . . 45

5 First Difference Regression by Industry on Balance Panel . . . . . . . . . . . . . . 46

6 IV Regression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

7 Robustness Checks with Fixed Effects Using Balanced Panel . . . . . . . . . . . . 48

8 Robustness Checks with Instruments Using Balanced Panel . . . . . . . . . . . . . 49

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1 Introduction

Through booms and recessions, charitable giving has been largely unabated over the past half cen-

tury. In recent years, total charitable donations now exceed 2 percent of GDP in the United States.

In the past two decades, the number of non-profit organisations registered with the Internal Rev-

enue Services (IRS) in the United States has almost doubled and the amount of private donations to

these organisations has almost tripled in real terms. (Figure 1 & 2) This sector has attracted interest

from applied microeconomists and public economists for its unique and intriguing dynamics that

primarily revolve around three key players: private donors who provide the resources to charities,

charitable organisations who allocate these resources, and the government who decides on the tax

policy of donations, level of support to various charities, and what and how much public goods it

will provide.

One of the most interesting questions revolves around the interaction between the government

and charitable organisations. It is apparent that the type and level of public goods the government

chooses to provide will influence charitable organisations’ decision to provide similar goods. But

more subtly, the government affects the charitable sector by giving grants and subsidies. In the

past two decades, government grants to charitable organisations have more than doubled from

under $60m to more than $120m. (Figure 2).

The dynamic interaction of these two sources of revenue to charitable organisations affects the

overall level of funding available for these organisations and the level of public goods provision.

Under the classical altruistic assumption, individuals who care about the level of public good

provision may decrease their contribution in response to an increase in government grants to a

charity. This is known as the crowding-out effect, meaning that increases in government grants

to a charity will only increase the charity’s total revenue by a fraction of the increased amount.

However, other theories and intuitions exist that challenge the existence of the crowding-out effect.

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Firstly, government funding may serve as a signal of the quality of a charity or the need of certain

public goods. In this case, government grants would actually crowd in private donations. Another

major challenge to the crowding-out hypothesis is that there are more reasons than being altruistic

for individuals to make a donation. It could be for tax reasons or the "warm glow” of giving as

suggested by Andreoni (1989).

In light of the conflicting theories in this sector, this paper examines the effects government

grants have on private donations and what the effects or lack of them can tell us about individual

behaviours. I based my study on the impure altruistic model. It predicts that if a marginal donor

donates to provide more and better public goods, then the effects government grants have on private

donations should be significant both statistically and economically. If there are other motivations

behind the marginal donor’s donation, then whatever effects government grants have on private

donations should be minimal.

Previous literature has utilised a variety of sources, including time-series data, cross-sectional

data and experimental data, seeking to answer this question and yet the findings are divergent.

Research using cross-sectional tax and survey data found that the crowding-out effect exists but

are not complete. The estimation generally falls in the range between zero and a half (Steinberg,

1991). On the other hand, research using public goods experimental data found that the crowding-

out effect is almost dollar-for-dollar (Andreoni, 1993; Roberts, 1984; Payne, 2001). Adding to

the diversity of findings, recent papers suggest that the crowding-out effect is negligible or instead

that there is a crowding-in effect, i.e. government grants to an organisation increase the amount of

donation this organisation receives from non-government sources (Okten and Weisbrod, 2000).

This paper makes two contributions to the literature on crowding out and crowding in of

private donations. First, though many economics and public finance scholars agree that intuitively,

the motivations behind donations have to go beyond pure altruism, to date, the inclusion of mo-

tivations other than altruism in donors’ utility functions has yet to be justified. Here I test for the

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existence and magnitude of crowding-out or crowding-in effects using instrumental variables to

control for endogeneity. Second, I challenge the notion of "efficiency price” proposed by Weis-

brod and Dominguez in 1986 . Under the assumptions of the impure altruistic model, the very idea

that the efficiency price, which measures how much resource a charity allocates to actual public

goods provision, matters to individual donors cannot be warranted. I use a panel data set with

macroeconomic indicators from fifty states in the US over 14 years to test the predictions of the

impure altruistic model.

In my study, I find that an exogenous increase in government funding leads to an increase

in private donations. This effect, though statistically significant, is of very small magnitude. I

also find that though high efficiency of an organisation would increase the amount of donations

it receives, it is often the case that the effect is not significant. Once instrumental variables are

introduced, the magnitude of such effects deceases drastically and ceases to be significant in any

way.

The presence of crowding in of private donations is important to the government and charit-

able organisations. The government may choose an optimal level of public goods provision achiev-

able through adjusting grants to various organisations. Without the knowledge of any crowding-in

effects, the government may spend more than necessary in grants and fail to achieve the optimal

level of public goods provision. For charitable organisations, understanding such effects would

allow them to maximise their revenue by strategically allocating resources in lobbying for more

grants and in fund-raising for more private donations.

The next section gives an overview of development in research on the charitable sector,

presenting both the theoretical developments and some major and potentially very different empir-

ical findings by previous studies. Section 3 presents the theoretical framework for this paper. I first

present a more qualitative framework of the charitable sector, followed by the model I use in the

subsequent study, the impure altruistic model. Section 4 describes the data, section 5 the estima-

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tion methods, and section 6 presents the results together with discussion. Section 7 concludes with

potential policy implications.

2 Literature Review

Early in the 1960s, the first academic papers on philanthropy started to appear in various economics

and political science journals. Ever since then, an increasing amount of research, both theoretically

and empirically, has been done in this area of public economics. One of the main reasons this topic

has attracted so much attention from economists is that philanthropy is based on the idea of altru-

ism, while economics as a discipline is based on the idea of self-interest. This seemingly startling

conflict has been the main drive behind almost all research. Given this generous body of literature,

this review however, will only address a small subset of these papers, focusing on those studying

how government grants may or may not crowd out private donations. Many organisations receive a

large portion of their revenue from government grants. In the past two decades, government grants

to charitable organisations have more than doubled in real terms, increasing from below $60 mil-

lion to about $120 million. A growing component of government grants has been in the industries

of health, education and social services: 66% of federal spending in 2004 (List, 2011). This large

amount of spending makes the dynamics of government and organisation’ interactions important

to public economists and policy makers.

2.1 Theory development

Rodgers and Hochman (1969) and Kolm (1969) were among the first economists to recognise that

charitable giving creates a public good. Although many beneficiaries of charitable organisations

are individuals and the goods and services they receive are private goods, for example day care,

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shelter and food, the fact remains that donors feel altruistically concerned towards these individu-

als. In this way, the private consumption of beneficiaries of these organisations becomes a public

good. Viewing the charitable sector, my focus is on how the government and charitable organisa-

tions interact. This interaction can occur in two ways. First, what and how much public goods a

government chooses to provide will affect the decisions of charitable organisations (Roberts, 1984).

Prior to World War II, most charitable institutions chose to support the poor, but as the government

took more and more responsibilities for this after the Great Depression, charities"began to refer

economically deprived clients" to government supported programmes and allocate their resources

elsewhere (Cloward and Epstein, 1965). In modelling these interactions between government and

organisations, the first theoretical model to emerge is one of complete crowding out built by Warr

in 1982 . He shows that any small lump-sum tax on donors who contribute to public goods will

completely crowd out private donations, i.e. the substitution between government provided ser-

vices and private donations will be dollar-for-dollar. The model assumes that individual donors are

indifferent between voluntary giving (donations) and involuntary giving (tax paid to government

to provide the public good). Thus, in an equilibrium of this model, an individual acts as if she

adds up her total giving, so that if one element of the sum, say involuntary giving, is to increase,

the other element, voluntary giving in this case, will decrease by exactly the same amount. This

was a natural model to turn to when the research in this area first started, but subsequent empirical

studies suggest that this model gives rather poor predictions (Steinberg, 1991).

One key assumption of the above model is that individuals are indifferent between all sources

of contribution towards provision of a public good, ceteris paribus. They behave as if they only

care about the total level of public goods supplied. However, one must realise that human beings

are moral, emotional and sympathetic and thus enjoy gratitude and recognition. More generally,

people may receive a "warm glow" from donating to various causes. Under this perspective, it can-

not be the case that people are indifferent between sources of donation: they would strictly prefer,

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all else equal, that the contribution comes from themselves rather than the government. Adding

this preference to the above model, Andreoni (1989; 1990) analysed and formulated a model with

"warm glow". It is more commonly known as the impure altruistic model, or the model of warm

glow. It contrasts with the previous model in which donations are motivated solely by a possibly

altruistic concern. This impure altruistic model is intuitively appealing, it is nonetheless an ad hoc

provision. It is important to find real evidence to confirm that warm glow is indeed an important

component of preferences, but conducting empirical research has proven extremely difficult. So

far scholars could only indirectly test the hypothesis by finding choices consistent with predictions

from this model (Ribar and Wilhelm, 2002). In Ribar’s paper, he tested the hypothesis using US

Foreign Aid organisations. He finds that indeed with a large sample of data, the marginal donor

seems to be motivated by reasons beyond altruism. Yet, his results have been disputed as research-

ers suggest that even with data consistent with the assumptions of the model, the difference in

magnitude of crowding-out or crowding-in effects still exist, especially when the type of organisa-

tions changes. Thus, it is important to extend Ribar’s test to more than one industry and examine

whether the model’s prediction holds for different industries. Even though empirical studies have

yet to confirm the impure altruistic model, in some experimental studies, results from controlled

laboratory experiments render overwhelming support for the impure altruistic model (Palfrey and

Prisbrey, 1996, 1997; Andreoni and Miller, 2002). Therefore, it seems reasonable as a first pass to

model private donor’s preferences as including a warm glow component.

2.2 Empirical Research and Findings

From the above discussed frameworks, two important questions are the centre of focus for literature

in this field: do government grants crowd out private giving and if yes, how and by how much? This

section will review some of the recent findings on these questions. Two recent papers, using similar

methods and data, provide some insight into answering both. Okten and Weisbrod (2000) use panel

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data of charitable organisations consisting of data from IRS Form 990; Khanna et al. (1995) use

comparable panel data for organisations from the UK. Both use similar methods and are built on

their prior studies on a single cross-sectional analysis. The main innovation from these two lines

of research is that a new variable called price is introduced into estimation of the model. Price is

constructed as the reciprocal of the proportion of donation revenue remaining after spending on

fund-raising (and management). The main justification for this variable comes from "plausible

irrationality" (Rose-Ackerman, 1982), the assumption that an individual donor may not be able to

distinguish between marginal dollars spent on fund-raising and average dollars spent. There has

been much debate on the interpretation of this variable since its introduction (Steinberg, 1991),

but it is important to include it in regression analysis, especially when we consider fund-raising

acts both as a signal for quality and as a waste" of donation revenue. Both papers consider several

estimation strategies and both add fixed effects to their estimation. They have similar onclusions.

First, both papers agree that the relationship between contributions and fund-raising is concave; a

higher price leads to lower donations and higher fund-raising expenditure leads to lower donations.

Then in terms of crowding out effects, they both find that the coefficient on government grant is

approximately zero. More precisely, both have point estimates on this coefficient to be positive

but statistically insignificant. They explain this as a piece of evidence that crowding out is not

important and crowding in is possible.

However, Payne (2001) challenges this explanation and evidence. She thinks that those who

contribute to organisations elect the government that decides on the level of grants. Thus, the

government and donors will have similar preferences towards certain charities. One example is

that in the year 2001 after 9/11, both government support and private donations increase and in

such years, estimation of coefficients will be biased. To investigate this further, she uses similar

data to Okten and Weisbrod, a panel of tax data for 430 organisations over a 10-year time span. The

sample is restricted to local non-profit organisations. Repeating OLS analysis as done by previous

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researchers, she obtains zero crowding out from point estimate as well. She then utilises 2SLS

regression in order to address endogeneity, using aggregate government transfers to individuals as

the first stage instrument. She believes that this variable correlates with political power but not with

demand for charitable services. Based on 2SLS, she estimates the crowding out effect to be about

50%, meaning that every dollar the government gives to an organisation will crowd out 50 cents of

private donation. This finding is a significant departure from the previous two papers. However, she

did not include fund-raising expenditure in her estimation. If fund-raising and government grant

depends on each other, this omission would lead to biased coefficients. Payne’s finding can at most

be seen as a reduced form estimate of crowding out by government grant, which is significant both

economically and statistically. Yet, it leaves open the question whether a government grant reduces

private donations directly as predicted by the classic crowding out hypothesis or it reduces private

donations because charities put in less effort to fund-raising.

A paper by Straub and Manzoor (2005) looks at the mechanism through which government

grants crowd out private donations. They follow the work by Kingma (1989) in the context of

public broadcasting in the US. They estimate a structural model on a panel of public radio stations.

The paper finds that the reduction in donation after a station receives a grant from the government

is due mostly to reduced fund-raising activities, the classic crowding out is negligible. This study

itself is very compelling. If these results could be extended to other types of charitable organisation,

it could change the views of crowding out effects and fund-raising strategies of charities.

One thing all the above-mentioned studies have assumed is that the relationship between

private donations and government grants is a one-way relationship. A very recent study by Heutel

(2009) suggests that this relationship is a two-way relationship, which challenges the previous as-

sumptions. He uses IRS tax data to estimate the relationship both ways and find that the prevailing

assumed relationship is much more significant: meaning it is more likely, statistically speaking,

that government grant leads to lower private donations rather than the other way around. This test

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for causation is relevant only to the extent when statistical significance is concerned. To confirm

or reject it, further study involving controlled quasi-natural experiments is needed.

3 Economic Framework and Theory

3.1 Determinants of private donations

I view nonprofit organisations as private suppliers of public goods. Individual donors contribute

money in return for an implicitly agreed level of quantity and quality of output. Potential donors

would decide on the level of contribution based on their demand for public goods. This is not

too different from the demand for purely private goods and thus depends on price, quality and

information about price and quality available to donors.

The classical model assumes that donors care about contributing output, not money. It is often

assumed that donors regard their marginal contribution to output to be proportional to the amount

of money donated and the marginal fund-raising expenditure associated with their contribution

is the same as the average overall ratio of fund-raising expenditures. Another assumption is that

organisations are well informed about their own outputs’ quality, at least much better informed than

donors. This gives an organisation the incentive to provide more information to potential donors

about the qualities if this could increase the amount of donations they receive. In this context, an

organisation’s fund-raising activity is analogous to advertising in the private market: on one hand

it provides more information to donors and increases donations; on the other hand it decreases

the amount of resources allocated to providing goods and services and thus decreases donations

from donors. Given these two opposing forces, the overall effect of fund-raising expenditure is

ambiguous (List, 2011).

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Programme service revenue is income generated by an organisation through related activities.

For example, a museum may charge admission fees and legal assistance groups may charge a

fee, though such a fee may be well below the market rate. It has two opposing effects on private

donation: it could be seen as a positive signal that the organisation is dedicated to its cause and

thus serves as a signal of self-help; however it is an extra source of income and crowding-out effect

may be in play.

Government grants send two signals as well: it could crowd out private donations if donors

care about the provision of public goods and consider that they have already contributed by paying

tax; or it tells the public that the organisation’s cause is valid and the needs this organisation

addresses are genuine. The classical model of donation suggests that government grants crowd

out private donations, meaning the first effect is more significant than the second one. However,

charities always advertise the grants they receive from the government. If government grants

actually crowded out private donations, it would be very unlikely that these organisations would put

in efforts in making such information public. Thus, crowding-in effects would be more consistent

with observed behaviour, if such effects indeed exist. It has been suggested that efficiency of an

organisation can be measured by the portion of donations spent on actually providing public goods

and services (Weisbrod and Dominguez, 1986; Ribar and Wilhelm, 2002). In some literature it is

often referred to as the efficiency price. It is intuitively true that the more efficient an organisation

is (in absolute terms and relative to similar organisations), i.e. the lower the price/cost of donation

is, the more donation it will receive.

3.2 Impure altruistic model

The effects of these key determinants, however, depend on the motivation of donation. The two

common motives are altruism and joy-of-giving. With an altruistic motive, donors care more

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about the provision of public goods and a significant crowding-out effect is expected: given the

optimal amount of resources needed to produce the socially efficient level of public goods, the

more government and other sources contribute, the less donors will donate. On the other hand,

with a joy-of-giving motive, crowding-out is negligible, meaning that donors prefer bathing in

the warm-glow of giving and care little about what the resources donated are used for. This idea

is captured formally by the impure altruistic model (Andreoni, 1989; Ribar and Wilhelm, 2002),

which upon adaptation may be used to explain the difference in magnitude of crowding-out effects

in previous literature.

The ith donor maximises the following utility function:

U =Ui(ci, H̃,hi) (1)

where ci is her consumption, H̃ is the total amount of donation and hi is her own donation. Her

income constraint would be ci +hi = yi− τi. Rewriting

H̃ = hi +H−i +HG (2)

where H−i is donation by other donors and HG is the government’s contribution. Then the budget

constraint can be written as

ci + H̃ = Zi (3)

and Zi ≡ yi− τi +H−i +HG can be viewed as her social income. Solving this gives the optimal

donation level

H̃∗ = qi(Zi,H−i +HG) (4)

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and her own optimal donation is

h∗i = qi(Zi,H−i +HG)−H−i−HG (5)

The corresponding differentials are as follow:

dh∗i = qi1(dyi−dτi +dH−i +dHG)+qi2(dH−i +dHG)−dH−i−dHG (6)

If the donor is motivated purely by altruism, qi1 > 0 and qi2 = 0. If the donor is motivated purely

by joy-of-giving, qi1,qi2 > 0 and qi1 + qi2 = 0 . That is to say, altruistically motivated donations

are completely crowded out by government grants while donations motivated by joy-of-giving face

almost zero crowding-out effects.

To analyse the aggregate effects, summing this over all donors, we have:

dH =

i=1

qi1qi1+qi2

(dyi−dτi)

1+NΣ

i=1

1−(qi1+qi2)qi1+qi2

+κNdHG (7)

where κN ≡ −AN1+AN

, AN ≡NΣ

i=1

1−(qi1+qi2)qi1+qi2

. Here κN represents the extend of crowding-out and it

depends on AN’s behaviour as N→ ∞.

This model predicts that in a large economy with many donors, under the assumption that

donors’ utility functions are concave, then the effect of government grants on private donations

would asymptotically approaches zero. If the marginal donor is not purely altruistically motivated.

Otherwise, the effect asymptotically approaches 11.

1For proof of this prediction, see Ribar and Welhelm (2002) Appendix

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4 Data

The data on charitable organisations come from IRS tax returns filed by eligible organisations.

They are based on Form 990 that must be filed by all 501(c)(3) organisations, except religious

groups and organisations with less than $25,000 in gross receipts. Private foundations are not

included as their main source of revenue is investment or endowment and they do not use their

revenue directly in charity activities. These organisations are required to file form 990-PF. The

data I use were sampled by Statistics of Income Division (SOI) of the IRS. Data from 1994-2007

are contained in micro-data files made available on SOI’s website, containing 268,455 observations

from all public charities filed within that fiscal year.

Organisations included in the data set are categorised using National Taxonomy of Exempt

Entities (NTEE). In this system, charities are categorised into 645 level codes, grouped in 26

major groups and 10 major categories. In order to test the model across different categories and

yet maintain a level of comparability, I include 7 out of 10 major categories, excluding religious

groups, mutual benefit organisations and membership based organisations2.

One concern that surfaces in the initial stage of this research is the reliability of the data from

IRS Form 990. It is believed that filing 990 is not a priority, Froelich et. al. (2000)report that

data contained are fairly consistent with audit data, especially in basic items such as donations,

programme service revenue, fund-raising expenditure and so on. I still chose to clean the data.

After dropping 501(c)(4-9) organisations, the data set contains 204,193 (76.1% of the initial

data set) observations on 28026 (68%) organisations. I first drop observations with clear reporting

error, i.e. organisations whose reported revenue by category does not add up to reported total

revenue or whose reported expenditure by category does not add up to reported total expenditure.

This drops 11823 (5.8%) observations and 924 organisations (3.2%). Then I exclude organisations2For description of all then major groups, see Appendix A

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that report a negative amount for private donations, government grants, programme service revenue

or fund-raising expenditure, eliminating a further 56 organisations.

This data is a very unbalanced panel. I include in my regression only those organisations

present for all 14 years, that is 63951 observations (33.2% of the total) and 4900 organisations

(30.2%). Below I consider how this would affect both the summary statistics and how it will affect

regression results. This balanced data set is used for baseline regressions, and regression results

based on the unbalanced panel are included as well for comparison.

During the initial data coding process, I realised that there are possible discrepancies in NTEE

code and state. In the balanced panel, none change their NTEE code over the 14 year period.

Some of them (0.8%) do change states. I suspect this to be due to data error which could present a

problem for my estimation, because I use state-year level and state-industry level control variables

and instruments. It is also possible that the organisation actually relocated. To distinguish one case

from the other, I consider organisations whose states are not the same for consecutive years to be

errors in reporting as I think it is highly unlikely that an organisation relocates in one year and

move back the next.

4.1 Descriptive Statistics

The charities’ revenue sources are represented in Figure 3, which considers different categories.

The first category is direct public support, which is the main category of private donations. Second

is indirect public support, including donations given to federated fund-raising agencies such as the

United Way. The third category is government grants, which include grants from federal, state

and local governments. Programme service revenue is the amount of revenue collected through

services under which the organisation is exempt from tax. For example, a school would count all

the charges from education services as programme service revenue. Dues collected include only

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amounts collected that are not donations, such as amount of membership fees going towards access

to facilities or subscription of newsletter. Investment income includes dividends and interest on

savings and cash accounts; rents and sales include revenue from sales of assets. The last category

includes all other forms of revenue, including income from special events.

Table 1 presents and compares summary statistics from the full, unbalanced data set to the

balanced panel. Private donations are calculated as the sum of direct and indirect public support.

Government grants and programme service revenues are taken directly from the data. It also reports

statistics on fund-raising expenditure, management expenditure3, programme service provision

expenditure and efficiency price4. We could observe from this table that means are much higher

than medians and even higher than the 75th percentile, suggesting that the data set is skewed

towards high-revenue firms. Thus, performing econometric analysis on this data set may over-

emphasise the effect from larger charities. Trends in these values from the unbalanced as well as

balanced sample are presented in Figure 2. The presence of crowding-out would imply that peaks

in government grants would be seen together with dips in private donations and vice versa. No

such pattern can be observed from Figure 2 as both seem to be increasing in the time period under

consideration. However, the trends are different across different categories. Figure 4a shows the

trneds in government grants for each category and 4b shows the trends in private donations for

each category.

3It is the amount of money spent on salaries, office administration, conferences and other activities relating to theday-to-day operation of an organisation.

4It is a concept representing the efficiency of an organisation. Numerically, it is the reciprocal of the proportion ofrevenue spent on providing public goods and services.

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5 Econometric Methods

Fundamentally, to test the validity of the impure altruistic model, two empirical questions are

examined. First, do government grants affect private donations? Second, what is the size of

crowding-out or crowding-in effects? While the majority of papers agree on the presence of

crowding-in or crowding-out effects, the extent of the effect varies largely from one to another.

In an attempt to address these two questions, I run regressions in which the level of private dona-

tions to a charity is the dependent variable and the level of government grants is an explanatory

variable. My initial attempts are to test whether it is appropriate to include a warm-glow preference

in the impure altruistic model. Following these initial regressions, I decide to include instrumental

variables in my analysis to address the endogeneity issues and hope to gain some understanding of

the causality between government grants and private donations.

The prediction of the impure altruistic model to be tested is that given a large economy with

many donors, crowding-in or crowding-out effects asymptotically approach zero. This prediction

can be translated into two hypotheses: First, it could be the case that the effects of government

grants on private donations are not statistically significant. Or it could be the case that these effects

do exist, but the size is economically small.

My estimating equation takes the form:

yit = βxit +BXit +αi + γt +δi +uit (8)

In this estimation model, I use the natural logarithm of my dependent and explanatory vari-

ables. The dependent variable yit is the level of private donations for charity i in year t . The right

hand side variable of interest xit is government grants. The net crowding-in or crowding-out effect

is β , or the elasticity of private donations in response to a change in the level of government grants.

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A vector of other explanatory variables Xit is included to account for the variation in private dona-

tions. I include a year fixed effect γt , state fixed effects δi and organisation fixed effects αi. These

fixed effects control for specific unobservable effects using panel data econometric methods. The

Hausman specification test rejects the assumption that the unobservable effect is uncorrelated with

the other regressors, so a fixed-effects model is used instead of a random-effects model. The error

term is uit .

The regression model I used for organisation level analysis is

lnDONit = β1 lnFUNDit−1 +β2 lnPRICEit +β3 lnGRANTit−1 +β4 lnPSRit−1

+β5 lnPRICE−it +β6 lnEXP−it +αi + γt +δi +uit (9)

where, in this particular specification, the dependent variable lnDONit is the natural logarithm of

the dollar amount of private donations received by organisation i in year t. lnFUNDit−1 measures

the organisation’s expenditures on fund-raising in the previous year. lnGRANTit−1 and lnPSRit−1

denote respectively, the natural logarithms of government grants and programme service revenues

the organisation received in the previous year.

PRICE−it represents the average of efficiency price at state- ndustry level of organisation i in

year t. It is constructed by calculating the weighted averages of PRICE for all organisations of the

same industry and located in the same state as organisation i. Similarly, EXP−it−1 is the average

of service expenditure, i.e. amount of revenue spent on providing public goods.

lnPRICEit is the natural logarithm of the "price” of contributing a dollar of output to the

organisation and is defined as PRICEit =1

1−Fit−Mit, Fit =

FUNDitREVit

and Mit =MEXPitREVit

, MEXPit is the

management expenditure and REVit is the total donation revenue of the organisation. The use of

lagged variables is common in the literature (Okten and Weisbrod, 2000; Payne, 2001; Andreoni

and Payne, 2003; Ribar and Wilhelm, 2002), though not typically well justified. It may suggest

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that individual donors are not well-informed enough to speculate on the current year level of grant

that will be received by an organisation, nor would they have good information on the fund-raising

or revenue generation behaviours of an organisation in the current year.

The inclusion of PRICE , i.e. the efficiency price as it is termed by Weisbrod (1986), is intu-

itively justified under a classical altruistic model. From the above construction we can see that it is

the reciprocal of the proportion of revenue spent on providing collective goods and services. Under

the assumption the donors care about the provision of public goods and services, it represents the

"price” of donating. That is, the higher proportion an organisation spent on providing public goods

and services, the lower the "price” of donation would be. Thus it is reasonable to say that the clas-

sical model predicts a negative effect of PRICE on private donations. In the meanwhile, a donor

motivated by reasons other than altruism would not care much about the level of public goods and

services and the above-mentioned effects would not be significant statistically or economically.

One concern in the specification is that the estimate of β3 will be biased if private donations

and government grants are determined endogenously. If there is a common shock, for instance

the increase in demand for disaster relief after an earthquake, both government grants and private

donations will increase, hence biasing β3 upwards. On the other hand, if a charity chooses to real-

locate funding between donations and grants, there will be a negative relationship between these

two variables, thus biasing β3 downwards. To address this problem, I use instrumental variables in

my regression.

An appropriate instrument must be relevant (affecting the level of government grants) and

excludable (not affecting private donations directly). I use government transfers to individuals

from Supplemental Security Income programme (SSI)5 and the state government budget6. SSI’s

basic level is determined at the federal level, but in reality many state governments choose to5This is the overall level of transfers and government giving in a state in a particular year. Data available at US

Social Services Administration6State budget data obtained from National Association of Budget Officers

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supplement the basic level. Thus, SSI is an instrument used to proxy for the level of generosity

of a state government, which is determined in a political process. This may be directly correlated,

however, with private donations as generous donors tend to elect generous governments. The state

budget is included as it positively correlates with level of government grants to organisations but

is unlikely to directly influence private donations.

Since all the data for instruments are at the state level, I collapsed my data set into one with

state-industry level averages, and treat each industry in each state as a unit of observation and run

the regression with the above mentioned instrumental variables. The only difference between this

state-level regression and the full panel regression is that I no longer include relative efficiency

price and relative service provision expenditure. These two variables were initially constructed as

the state-industry level averages and upon aggregating, they will simply be the level of efficiency

price and service provision expenditure in the new state-industry level data set. At the state-level,

I added in two control variables to the regression. I obtain the state-year level unemployment rate

from the Bureau of Labour Statistics and the state-year level of GDP from the Bureau of Economic

Analysis. Thus, my regression model for this analysis is

lnDON jt = β1 lnFUND jt−1 +β2 lnPRICE jt +β3 lnGRANTjt−1 +β4 lnPSR jt−1

+β4 lnGDPjt−1 +β5 lnUE jt−1 +u jt (10)

GRANTjt−1 = γ1BUDGETt−1 + γ2SSIt−1 (11)

where GDP is the state-level gross domestic product and UE is the state-level unemployment rate.

The regression results and test statistics suggest that identification of the effect of government

grants on private donations is successful. The F-statistics for the significance of the instruments in

the first stage are all greater than 10. Other papers have used lagged variables in their first stage

regression. It could eliminate part of endogeneity but it still remains a concern. I include the results

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from such models in the appendix.

Lastly, I also run regressions by industry, as previous literature suggests that different indus-

tries exhibit different behaviours which can already be observed from Figure 4. This seems to have

been a reason that many of the papers on crowing-out effects do not agree with each other. As an

alternative approach, I also use the interaction between industry dummy variables and government

grant at the state level to examine how the effects of government grant on private donations would

differ between industries. In this regression with interactions, I use a simultaneous equations ap-

proach to estimate the coefficients. First I constructed variables of the form Industry×GRANT

, Industry×Budget and Industry× SSI , the latter two serve as instruments of the interaction

involving the endogenous variable GRANT . This is valid asIndustry variables are exogenous.

I choose to exclude religion related groups in all of the above-mentioned regressions, because

there are only 32 such organisations in the full panel data set and 14 in the balanced data set7.

Given such a small number of observations present, the regression results will not be representative.

Moreover, most of the religion related groups do not generally receive government grants and thus

the regression results will not be very relevant to this analysis.

For all instrumental variable regressions, I report the first stage regression results in the Ap-

pendix. In the main regression tables, I present the F-statistic in the instruments from the first stage

regressions, Hansen over-identification test J-statistic and the Cragg-Donald F-statistic for weak

instruments.7balanced data set, henceforth, refers to the data set containing only organisations that have data available for all

14 years.

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6 Regression Results

The results are presented in Table 2 through 8. Table 2 and Table 3 present results with different

fixed effects. Table 2 reports results from the unbalanced panel and Table 3 reports results from

the balanced panel. Regressions by industries are presented in Table 4 and Table 5. These regres-

sions are done using first-difference panel regressions, i.e. all fixed effects are being accounted for.

Table 4 is based on an unbalanced panel while Table 5 is based on a balanced panel. Instrumented

regression results, using specification 10, are reported in Table 6 (first stage results in Table B1).

The regression results with specifications involving interactions between industries and govern-

ment grants are presented in appendix tables C1 and C2, with first stage F-statistic summaries.

Table 7 and 8 provides robustness checks by limiting the panel to different sub-samples. Table 7

is done using first-difference panel regression based on balanced panel, and results are compared

with Column 4 of Table 3. Table 8 is done using specification 10 with instruments based on the

balanced panel, and results are compared with Column 2 of Table 6. First stage results for Table

8 can be found in appendix Table B2. All reported standard errors are robust to heteroskedasticity

and auto-correlation with a Newey-West estimator of the co-variance matrix. The analysis of re-

gression results focuses mainly on those obtained from the balanced data set. The results from an

unbalanced panel are not explicitly discussed, though they are very similar to those obtained from

the balanced data set.

The main focus of Table 2 and 3 is to compare how the magnitude and level of significance

change as more fixed effects are added in. In the first column, only time fixed effects are included

and all coefficients except relative efficiency price are significant. At this early stage, it appears

that there exists no crowding-out effects and only crowding-in effects. Programme service revenue

seems to crowd out private donations, fund-raising expenditure brings in more donation as expected

(as it provides more information to donors) and the efficiency price is negatively correlated with

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private donation, which is consistent with the classical model. State fixed effects are added in

the second column and coefficients’ magnitude do not vary much, though the relative efficiency

price appears to be more significant in this column. In the third column, industry fixed effects

are included as well. In this column, programme service revenue ceases to be significant and the

magnitude and significance level of the efficiency price drops. For the last column, all fixed effects

are being considered through the use of a first-difference panel regression and we notice a drastic

decrease in the magnitude of government grants, fund-raising expenditure, the efficiency price and

relative service provision. The government grant and fund-raising expenditures remain statistically

significant at 1% levels. The Programme service revenue coefficient becomes positive in the fixed-

effects model and statistically significant at the 1% level. This suggests that although programme

service revenue can theoretically have both positive and negative effects, the negative effects are

more likely to be due to unobservable organisation or industry level effects. Once all fixed effects

are accounted for, the positive effect prevails and this finding is consistent with previous literature

which suggests no negative effect of PSR on private donations and some positive impact (Khanna

et al., 1995).

6.1 Government Grants

After all fixed effects are accounted for, the coefficient for government grants remains positive and

statistically significant at 1% significance level (Column 4 of Table 3). This is consistent with

earlier work by Khanna et al. (1995) and Payne (2001). This is also consistent with the impure

altruistic model which predicts that additional increases in govrnment support have very limited

effects on private donations in a large economy. A statistically significant yet economically small

estimate indicates the donors’ preferences are not guided at the margin by altuisim.

In Table 4 and 5, I use panel regression with fixed effects to explore the difference in coef-

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ficient for government grants in different industries. Column 1 of Table 5 is taken directly from

Column 4 of Table 3 for comparison and the next 7 columns represent one industry each. The

coefficients for government grants are positive and significant in general, with the exception being

the education industry. One explanation for the lack of significance in estimator for government

grants in the education industry would be that almost all donors are well aware of the presence of

these organisations and there are many other ways for donors to understand the quality and quant-

ity of goods and services provided by organisations in education. Thus, government grants would

not be as strong a signal of either the presence or the quality of these organisations.

Another interesting thing to note from this table is that in international and foreign affairs

organisations, the magnitude of the government grants’ coefficient is almost twice as large as

in other industries. This means that in this particular industry, government grants have a much

stronger effects on private donations. This is reasonable as one would expect these organisations

to rely heavily on government grants. Government grants would send a much stronger signal in

the industry of international affairs than in other industries, possibly because an average donor has

no thorough understanding of the needs of people in a foreign country or are not even aware of the

existence of these organisations.

In Table 6 I run regression based on specification (10) at the state level. Column 1 is based on

the unbalanced panel while Column 2 is based on the balanced panel. The coefficient of govern-

ment grants remains positive and statistically significant at 5% significant level. Tables 6 presents

the F-statistics for the joint significance of the instruments in first-stage regression and they are

strongly significant for all specifications. They also present Hansen J-statistics from test of the

over-identification restriction, possible because the number of instruments exceeds the number of

endogenous regressors. The null hypothesis of this test is that the instruments are valid, so a rejec-

tion calls into question the validity of the instruments. The null hypothesis cannot be rejected in

Table 6. Cragg-Donald F-statistics from a test for weak instruments are also reported. It should be

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noted that the Cragg-Donald F-statistics are quite low compared to their critical values.

In these regression results, I found no evidence of crowding-out. To the contrary, there exist

crowding-in effects. However, these effects are of very small magnitude for 6 out of 7 industries.

This small magnitude confirms the prediction of the impure altruistic model, and suggests that

at the margin, the donor is not purely motivated by altruism. In addition, this rather consistent

effect for all the major groups of nonprofit organisations suggests that the difference in estimates

of government grants’ effects cannot be due to the types of organisations included in a sample.

Overall, regression results suggests that a 1% increase in government grants to a charity increases

the charity’s private donations by about 0.08%. These results are generally significant at the 1%

level.

Though fund-raising activities could be helpful, government grants to these organisations

make donors aware of potential recipients and needs of which they may not have been aware.

6.2 Fund-raising Expenditure

As discussed in Section 3.1, fund-raising expenditure has two opposing effects. On one hand it

provides more information to potential donors and increases private donations and on the other

hand, it can be seen by concerned donors as a "waste" of revenue and thus discourages them from

donating. In my regression, the first effect is captured through the coefficient on fund-raising

expenditure and the second effected captured by the coefficient of efficiency price. In Table 3, it

is clear that the coefficient on fund-raising expenditure is positive and significant both statistically

and economicaly. In the meanwhile, the coefficient on efficiency price is no longer significant once

all fixed effects are accounted for. Thus I would conclude that the overall effect of fund-raising

expenditure is positive, meaning that it increases private donations by providing donors with more

information.

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In Table 5, the cross-industry analysis shows that efficiency price is not significant except

for environment and animal support organisations. One explanation would be that many of these

organisations’ financial situations are under more scrutiny and the public tends to criticise these

organisations’ "waste" of revenue more. However, without further data and study to substantiate

this explanation, the result remains puzzling. Across all 7 industries in Table 5, coefficients on

fund-raising expenditure are all positive and significant at 1% significance level. There, however,

are differences in magnitudes of these coefficients, and I would speculate that the more well-known

an organisation is, the smaller the impact fund-raising would have on private donations marginally.

This can be confirmed if a proxy for reputation of an organisation can be identified and included

in the specification. 8. Once instrument variables are introduced, efficiency price is not siginificant

and fund-raising expenditure becomes more siginificant economically.

The lack of statistical significance of the coefficient on efficiency price seems to be in lieu with

the prediction of the impure altruistic model. The foundation of the idea of efficiency price and

inclusion of it in econometric estimation models are based on the assumption that donors care about

the output of public goods and services. If donors do not care what amount of quality of public

goods are provided, then they have no reason to see expenditure on fund-raising or management

as a "waste" of revenue. However, this is not to say that donors do not care about the provision

of public goods and services at all, it only suggests that donors do not care as much as previous

literature conjectured and donors do not donate just because they would like to see more public

goods provided.

One interesting thing to note here about fund-raising expenditure is that it appears to have a

much stronger impact on private donations then government grants do. In Table 3, the effect of

fund-raising is about 5 times stronger as suggested by regression results and in Table 6 the effect

8Many other papers suggest that the age of an organisation, i.e. the number of years since the establishment of anorganisation, would serve as a good proxy for reputation. However, such a variable is no longer available in the SOImicrodata file and thus excluded from the specification

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of fund-raising is estimated to be about ten times the size of government grants’ effect. Since both

fund-raising and government grants can serve as signals to potential donors, this big difference in

magnitude suggests that donors react more to changes in fund-raising than changes in government

grants. One possible reason for this could be that fund-raising events have a much higher visibility,

meaning that when there is a fund-raising campaign, many donors would have direct access to it.

In the meanwhile, though government grants could be a more credible signal, these are not easily

accessible. The amount and type of grants are usually released through government bulletins or

organisations’ press releases, both tend to be lengthy and not many donors would actually read

through all of them.

6.3 Other Determinants

Programme servie revenue is a source of income for non-profit organisations and thus theoretically

under the classical assumption of donation, it could crowd out private donations. On the other

hand, it can also be seen as a signal of self help, indicating that an organsation is serious about its

cause. This could increase private donations. From Table 3, programme service revenue has a pos-

itive impact on private donations after all fixed effects are accounted for. Before fixed effects are

included, its coefficients are negatively significant. This change in sign suggests that the crowding-

out effect programme service revenue has on private donations is due to unobservable effects at

the organisation level. In Table 5, programme service revenue is significant in 4 out of 7 industries

which is not surprising. When we look at the 3 industries in which it is not significant, we realise

that these industries such as environmental groups, international aid organisations and public bene-

fits organisations (such as research institutes) do not generate revenues under the activities they are

exempt from taxes, or at least the generation of programme service revenue by these organisations

are not visible to the public. To the contrary, the other organisations generate programme service

revenue through much more explicit and visible manners. For example, arts organisations could

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hold exhibitions and performances with tickets sales, educational organisations do charge for the

education they provide, health services charge for medical services and human services organisa-

tions such as legal assistance groups charge fees for services as well. Though these fees may be

below market rate, they are still considered revenues generated and donors to these organisations

are well aware of the existence of these incomes. In the instrumented regressions, programme ser-

vice revenue are no longer significant. It is worth noting the signs, magnitude and significance of

this estimator vary widely in different specifications and with different industries, which I suspect

could be due to an underlying mechanism involving interactions of programme service revenue

and other explanatory variables in each speficiations 9.

The inclusion of relative efficiency prices and relative service provision aims to examine

whether there exists a substitution effect when donors decide which organisation to donate to.

Intuitively, if donors know there are more efficient and better organsations within proximity and

offering similar services, they would be more inclined to donate to these better organisations. When

fixed effects are accounted for, both terms are negatively significant, suggesting the existence of

substitution effects. However, the actual substitution effect may not be as significant because the

relative efficiencies and provisions are aggregated at NTEE major group level and within a major

group, organisations still provide a wide range of public goods and services. As the industries are

divided into smaller sub-groups, I would expect the substitution effect to decrease significantly.

This would possibly explain why when the regression is performed within each major group, the

significance level drops drastically.

State level control variables GDP and unemployment rates are important to be included in

specification (10) because the aggregate level donations would be more closely related to the over-

all economic conditions. I omitted them in specification (9) following the previous literature in

9For instance, one possibility would be that in an economic recession, organisations would generate much lessrevenue. Thus programme service revenue would be correlated with GDP level and unemployment rate in specification10

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which state level macroeconomic indicators do not have a significant impact on individual donors

or organisations (Okten and Weisbrod, 2000; Heutel, 2009; Payne, 2001).

6.4 Robustness Checks

To examine the robustness of above estimated coefficients, I limit the data set to smaller sub-

samples and perform regressions on them. The results are reported in Table 7 and Table 8. In each

table, the first column excludes organisations that has never received government grants, the second

column excludes organisations that ever have zero fund-raising expenditure and the third column

excludes organisations with revenues in the top 5%. Table 7 is produced using panel regression

with first difference, in its last column is results from Column 4 of Table 3. Table 8 is done using

specification (10) and its last column is Column 2 of Table 6.

From both tables, it appears that the estimated coefficients are robust to these restrictions.

Of special interests is the results in Column 3 of both tables. While cleaning up the data, I have

concerns that the estimates would be strongly biased towards the larger organisations and suspect

that if a sample with small organisations was used, the results would be quite different. However,

we can see from Column 3 that though the coefficients on government grants increase, the changes

are rather small and these coefficients remain significant at 1% level. This finding seems to suggest

that the impact of government grants has some correlation with the size of an organisation, or if

size can proxy reputation of an organisation, then the extent of crowding-in effects would depend

on the reputation. Coefficients on fund-raising expenditure decrease by about 50%, though still

significant at 1% level. Again, if size is a good proxy for reputation, I would suspect that the

success of fund-raising events depends on reputation as well. The fact that fund-raising changes

more than government grants do suggests that again, fund-raising activities appear to be more

visible and accessible to donors than the information regarding government grants.

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The by industry regression also provides a means of robustness checks. Some types of non-

profits may not truly be providing public goods, though they are of nonprofit status. For instance,

it is debatable whether a theatre company or an orchestra provide output that can be considered a

public good. It also gives us an opportunity to examine how certain characteristics only pertinent

to one industry would affect the coefficients.

7 Conclusion

7.1 Contribution to existing literature

Warr and Roberts proposed crowding-out of private donations by government grants. This was ex-

tended to include a warm-glow effect in Andreoni. Since then a large body of empirical studies has

followed. Many of them, including Kingma and Payne find significant evidence of partial crowding

out effects, and other papers such as Khanna et. al and Payne find evidence of crowding in effects.

Many researchers believed that the differences arose due to econometric specifications or the type

or organisations involved. Only until recently, Ribar and Welhelm suggested that the difference

lies within the impure altruistic model and could be related to the size of samples used. Here I ex-

tended the literature by using a large data set including all types of charitable organisations except

religious groups. The results I obtained above appear in favour of the impure altruistic model and

question the explanation that different types of organisations exhibit very different crowding-in

or crowding-out effects. I extended Ribar and Welhelm’s empirical study from international aid

organisations to all types of organisations and validate the prediction that crowding-out effects are

small in large samples.

My findings confirm the effect of fund-raising as a way to provide more information to donors

and thus increase donations. In addition, the fact that fund-raising brings in more private donations

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than government grants would suggest that organisations spend relatively more on fund-raising

campaigns and less on lobbying activities. I found no evidence of efficiency playing a significant

role in determining private donations as Okten and Weisbrod (2000) suggested, it seems to confirm

the assumption that donors do not care much about how raised funds are spent, thus suggesting

that their preference includes more factors than just providing public goods and services. It is

reasonable to think that government could increase funding to charitable organisations in order

to increase social welfare. However, it is worth noting that the efficiency of an organisation, i.e.

where it is spending its funds, cannot be monitored very well, and if donors do not care much

about efficiency either, there is need for new mechanisms to fund these organisations and keep

them accountable.

7.2 Limitations and possible future research

According to the impure altruistic model, if for an industry the crowding-out effect is close to

zero, one possible explanation would be that at the margin altruistic motivation is weak. On the

other hand, if the crowding-out effect is close to one, it might be because the marginal donor is

motivated by altruism. If the difference in motivations can be justified by putting them in the con-

text of policy and legal framework specific to an industry, it could explain the differences in the

extent of crowding-out effects across different industries. For this conjecture to be possible, the

model requires a large economy with almost infinitely many donors. The panel data set to be used

fulfills this condition: it contains over 160,000 observations for 14 years. However, unless rela-

tionship between number of donors and crowding-out effects is examined, the proposition cannot

be explicitly confirmed by empirical evidence.

One possible extension would be to consider a model involving different types of public

goods, rather than just one public good. How would government and individuals respond to

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changes in contributions among different types of organisations is an interesting question to study.

The regression results for different industries in Table 4 and 5 have suggested that different in-

dustries exhibits different behaviours, but it does not consider the possibility that donors donate to

more than one type of organisations and government must allocate finite funding between different

types of organisations.

In addition, the finding of this research is limited to the extent that there were no major or

drastic changes in government policies towards charitable organisations between 1994 and 2007.

Though government grants to the charitable sector has increased significantly, it happened gradu-

ally throughout the years rather than over a short period of time. Thus the results are limited to

situations where changes in governmental support are modest. The validity of the model in the

context of drastic changes in government grant requires further study using simulation and/or field

experiments.

7.3 Policy implications

Government supports the provision of public goods, whether by providing them itself or by fund-

ing organisations that provide them. The government’s aim would be to increase social welfare by

overcoming the free rider problem inherent in public goods. Prior literature on crowding out sug-

gests that governments ought to acknowledge the effects of their grants on private donations. This

paper suggests that the government may not have to, as the effects of government grants on private

donations are very limited. Instead of being concerned with the direct effect it has on private dona-

tions, it should focus more on how grants affect organisations’ fund-raising behaviour, which has

a bigger impact on private donations.

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References

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effect for charitable contributions. Journal of Political Economy, 97:1197–1207.

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Kolm, S. C. (1969). The optimal production of social justice, pages 145–200. London.

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180.

Okten, C. and Weisbrod, B. A. (2000). Determinants of donations in private nonprofit markets.

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experiments. Journal of Public Economics, 61:409–427.

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Straub, J. D. and Manzoor, S. H. (2005). The robustness of kingma’s crowd-out estimate: evidence

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75,000

95,000

115,000

135,000

155,000

175,000

195,000

215,000

235,000

255,000

275,000

20072006200520042003200220012000199919981997199619951994199319921991199019891988

Figure 1: Trends in Number of Non-Profit Organisations

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25.0

45.0

65.0

85.0

105.0

125.0

145.0

165.0

185.0

205.0

225.0

20072006200520042003200220012000199919981997199619951994199319921991199019891988

Millions

Total Private Contribution Government Grant

*in 2007 dollars

Figure 2: Aggregate Trends in Private Donations and Government Grants

39

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Direct Public Support22%

Indirect Public Support8%

Government Grants18%

Programme Service Revenue41%

Investment Income4%

Dues1%

Renst and Sales3%

Other3%

Figure 3: Source of Revenue

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0

500

1000

1500

2000

2500

3000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Governm

ent G

rants in thou

sand

s of d

ollars

Arts and Culture Education Environment & Animals Support Health Services

International and Foreign Affairs Public and Societal Benefit Human Services

(a) Government Grants

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Private Don

ations in

 Tho

usan

ds of D

ollars

Arts and Culture Education Environment & Animals Support Health Services

International and Foreign Affairs Public and Societal Benefit Human Services

(b) Private Donations

Figure 4: Trends in Private Donations and Government Grants by Industry

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Table 1: Summary Statistics

Observations Organisations Mean Median Standard Deviation 75th Percentile

Full Data Set 268455 41193

Private Donation 2.855 0.823 21.342 21.562

Government Grant 1.334 0.061 15.831 10.110

Fundraising Expenditure 0.236 0.082 4.570 0.110

Efficiency Price 1.059 0.765 0.949 1.025

Programme Service Revenue 29.725 9.754 270.2 13.955

Management Expenditure 4.398 2.089 27.264 2.508

Service Provision Expenditure 29.498 10.78 267.2 16.583

Balanced Data Set 63915 4900

Private Donation 4.762 3.906 26.706 27.901

Government Grant 2.056 1.870 21.722 29.213

Fundraising Expenditure 0.443 0.309 1.579 3.089

Efficiency Price 1.018 0.504 0.783 1.037

Programme Service Revenue 56.664 27.331 292.1 42.006

Management Expenditure 8.096 5.838 24.823 7.903

Service Provision Expenditure 55.546 38.627 277.4 52.459In millions of dollars and adjusted to 2007 dollars

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Table 2: Regression Results with Fixed Effects on Unbalanced Data Set

OLS OLS OLS First Difference

Programme Service Revenue -0.0389∗∗∗ -0.0340∗∗∗ 0.00590 0.172∗∗∗

[0.00857] [0.00860] [0.00948] [0.00746]

Government Grant 0.0744∗∗∗ 0.0737∗∗∗ 0.0808∗∗∗ 0.0530∗∗∗

[0.00884] [0.00894] [0.00875] [0.00504]

Fundraising Expenditure 0.749∗∗∗ 0.739∗∗∗ 0.690∗∗∗ 0.224∗∗∗

[0.0142] [0.0142] [0.0150] [0.00608]

Efficiency Price -4.904∗∗∗ -4.862∗∗∗ -3.771∗∗∗ -0.985∗∗∗

[0.974] [0.969] [0.898] [0.277]

Relative Service Provision 0.204∗∗∗ 0.207∗∗∗ 0.210∗∗∗ -0.00245[0.0146] [0.0145] [0.0149] [0.00789]

Relative Efficiency Price 1.624∗∗ 1.636∗∗ 0.918 -0.480∗

[0.545] [0.540] [0.531] [0.192]

Time Fixed Effects yes yes yes

Location Fixed Effects yes yes

Industry Fixed Effects yes

Constant 1.903∗∗∗ 1.422∗∗ 1.471∗∗∗ 0.842∗∗∗

[0.0435] [0.432] [0.431] [0.0169]

Observations 29786 29786 29786 29786R2 0.642 0.650 0.663 0.114Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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Table 3: Regression with Fixed Effects Results on Balanced Data Set

OLS OLS OLS First Difference

Programme Service Revenue -0.0686∗∗∗ -0.0652∗∗∗ -0.0141 0.206∗∗∗

[0.0129] [0.0127] [0.0143] [0.0100]

Government Grant 0.0936∗∗∗ 0.0973∗∗∗ 0.0997∗∗∗ 0.0588∗∗∗

[0.0130] [0.0133] [0.0129] [0.00657]

Fundraising Expenditure 0.763∗∗∗ 0.749∗∗∗ 0.683∗∗∗ 0.274∗∗∗

[0.0235] [0.0235] [0.0244] [0.00853]

Efficiency Price -4.843∗∗ -5.073∗∗ -3.180∗ -0.630[1.557] [1.550] [1.333] [0.408]

Relative Service Provision 0.243∗∗∗ 0.245∗∗∗ 0.258∗∗∗ -0.0206∗

[0.0211] [0.0209] [0.0218] [0.0104]

Relative Efficiency Price 1.659 1.895∗ 0.706 -0.995∗∗∗

[0.860] [0.852] [0.789] [0.300]

Time Fixed Effects yes yes yes

Location Fixed Effects yes yes

Industry Fixed Effects yes

Constant 2.094∗∗∗ 1.582 1.772∗ 1.065∗∗∗

[0.0604] [0.839] [0.803] [0.0276]

Observations 16167 16167 16167 16167R2 0.649 0.662 0.680 0.162Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

44

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Table 4: First Difference Regression by Industry on Unbalanced Panel

All Organisations Arts Edu Env Health Intl Public Human

Efficiency Price -0.985∗∗∗ -0.294 -0.0137 -5.807∗∗ 0.637 -2.032 -4.607∗∗ -1.263[0.277] [0.363] [0.882] [1.982] [1.937] [4.570] [1.748] [0.718]

Fundraising Expenditure 0.224∗∗∗ 0.302∗∗∗ 0.205∗∗∗ 0.404∗∗∗ 0.188∗∗∗ 0.284∗∗∗ 0.277∗∗∗ 0.145∗∗∗

[0.00608] [0.0155] [0.0119] [0.0360] [0.0163] [0.0473] [0.0314] [0.0111]

Government Grant 0.0530∗∗∗ 0.0489∗∗∗ 0.00800 0.0617∗∗ 0.0598∗∗∗ 0.119∗∗ 0.0455∗ 0.0591∗∗∗

[0.00504] [0.0109] [0.00962] [0.0217] [0.0149] [0.0419] [0.0197] [0.00986]

Programme Service Revenue 0.172∗∗∗ 0.0736∗∗∗ 0.367∗∗∗ 0.146∗∗∗ 0.282∗∗∗ 0.126∗∗ 0.0439 0.139∗∗∗

[0.00746] [0.0156] [0.0172] [0.0357] [0.0267] [0.0466] [0.0247] [0.0134]

Relative Efficiency Price -0.480∗ -1.066∗∗∗ -1.971∗ 0.536 -0.660 -2.981 1.849∗ 0.239[0.192] [0.275] [0.772] [1.108] [1.052] [2.201] [0.887] [0.488]

Relative Service Provision -0.00245 0.00702 -0.0322∗∗ 0.0108 0.00509 -0.0444 0.0326 0.0545∗∗

[0.00789] [0.0169] [0.0115] [0.0478] [0.0303] [0.0860] [0.0408] [0.0181]

Constant 0.842∗∗∗ 1.409∗∗∗ 0.485∗∗∗ 2.012∗∗∗ -0.371∗∗∗ 2.645∗∗∗ 1.615∗∗∗ 0.203∗∗∗

[0.0169] [0.0307] [0.0564] [0.0645] [0.0919] [0.122] [0.0517] [0.0333]

Observations 29786 4905 11103 941 4641 332 1321 6511R2 0.114 0.128 0.157 0.265 0.103 0.217 0.110 0.088Industries (1)-(7):Arts, Education, Environment and Animal Support, Health Services, International Affairs, Public and Societal Benefits and Human ServicesStandard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

45

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Table 5: First Difference Regression by Industry on Balance Panel

All Organisations Arts Edu Env Health Intl Public Human

Efficiency Price -0.630 0.343 -0.0730 -6.563∗ 2.081 4.047 -1.983 -2.055[0.408] [0.577] [1.089] [2.653] [2.591] [7.132] [2.377] [1.208]

Fundraising Expenditure 0.274∗∗∗ 0.408∗∗∗ 0.236∗∗∗ 0.578∗∗∗ 0.185∗∗∗ 0.418∗∗∗ 0.290∗∗∗ 0.184∗∗∗

[0.00853] [0.0231] [0.0148] [0.0453] [0.0236] [0.0748] [0.0480] [0.0170]

Government Grant 0.0588∗∗∗ 0.0466∗∗ 0.0179 0.0833∗∗ 0.0650∗∗ 0.116∗ 0.0842∗∗ 0.0665∗∗∗

[0.00657] [0.0154] [0.0110] [0.0273] [0.0199] [0.0508] [0.0312] [0.0135]

Programme Service Revenue 0.206∗∗∗ 0.0542∗ 0.364∗∗∗ 0.0645 0.389∗∗∗ 0.0856 0.0568 0.201∗∗∗

[0.0100] [0.0223] [0.0201] [0.0393] [0.0390] [0.0739] [0.0346] [0.0188]

Relative Efficiency Price -0.995∗∗∗ -1.641∗∗∗ -2.184∗ -0.613 -1.702 -6.276 -0.0937 0.603[0.300] [0.461] [0.979] [1.427] [1.472] [3.659] [1.198] [0.723]

Relative Service Provision -0.0206∗ 0.0263 -0.0395∗∗ 0.0585 -0.0837 0.106 0.0442 0.0266[0.0104] [0.0260] [0.0131] [0.0522] [0.0465] [0.134] [0.0657] [0.0283]

Constant 1.065∗∗∗ 1.969∗∗∗ 0.605∗∗∗ 2.659∗∗∗ -0.725∗∗∗ 2.994∗∗∗ 2.044∗∗∗ 0.464∗∗∗

[0.0276] [0.0367] [0.0700] [0.0701] [0.164] [0.192] [0.0647] [0.0471]

Observations 16167 2281 7848 458 2432 174 624 2336R2 0.162 0.178 0.191 0.446 0.136 0.285 0.138 0.169Industries (1)-(7):Arts, Education, Environment and Animal Support, Health Services, International Affairs, Public and Societal Benefits and Human ServicesStandard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

46

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Table 6: IV Regression

(1) (2)

Fundraising Expenditure 0.615∗∗∗ 0.696∗∗∗

[0.0348] [0.0311]

Government Grant 0.0848∗∗∗ 0.0727∗∗

[0.0255] [0.0276]

Programme Service Revenue -0.0268 -0.0129[0.0180] [0.0158]

Efficiency Price -0.0678 -0.0949[0.142] [0.108]

State GDP 0.172** 0.169**[0.0900] [0.0842]

State Unemployment 0.132 0.147[0.0908] [0.0981]

Constant 2.173∗∗∗ 2.196∗∗∗

[0.0746] [0.0687]

Observations 1941 1567

F-statistic for instruments 31.09 35.17Hansen test statistic 1.081 1.032Cragg-Donald Statistic 1.793 1.115Column 1 on unbalanced panel, column 2 on balanced panelOnly observations from 1999-2007 are included as SSI data are only available in those years.Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

47

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Table 7: Robustness Checks with Fixed Effects Using Balanced Panel

Exclude if Never Receive Exclude if Zero Exclude if in Column 4 ofGovernment Grants Fund-raising Top 5% of Revenue Table 3

Fundraising Expenditure 0.312*** 0.350*** 0.148*** 0.274***[0.00722] [0.0107] [0.0231] [0.00853]

Efficiency Price -0.704 -0.409 -0.741 -0.630[0.511] [0.303] [0.396] [0.408]

Programme Service Revenue 0.218*** 0.256*** 0.277*** 0.206***[0.0103] [0.0246] [0.0309] [0.0100]

Government Grant 0.0629*** 0.0542*** 0.0640*** 0.0588***[0.00729] [0.0124] [0.0102] [0.00657]

Relative Efficiency Price -0.876*** -0.905** -1.004** -0.995***[0.210] [0.468] [0.563] [0.300]

Relative Service Provision -0.0334* -0.0308 -0.0293* -0.0206*[0.0127] [0.0190] [0.0144] [0.0104]

Constant 0.988*** 1.188 1.177*** 1.065***[0.0198] [0.0567] [0.0340] [0.0276]

Observations 15980 15962 15351 16167

R2 0.200 0.174 0.183 0.162Standard errors in brackets∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗p < 0.001

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Table 8: Robustness Checks with Instruments Using Balanced Panel

Exclude if Never Receive Exclude if Zero Exclude if in Column 2 ofGovernment Grants Fund-raising Top 5% of Revenue Table 6

Fundraising Expenditure 0.578*** 0.609*** 0.377*** 0.696***[0.0529] [0.0671] [0.0156] [0.0311]

Efficiency Price -0.100 -0.0891 -0.120 -0.0949[0.0722] [0.0683] [0.114] [0.108]

Programme Service Revenue -0.0172 -0.0165 -0.0144 -0.0129[0.0203] [0.0137] [0.0110] [0.0158]

Government Grant 0.0599*** 0.0574*** 0.0740*** 0.0727**[0.0123] [0.0170] [0.0266] [0.0276]

State GDP 0.134** 0.142** 0.178** 0.169**[0.0663] [0.0678] [0.0889] [0.0842]

State Unemployment 0.112 0.154 0.190 0.147[0.0823 [0.0938] [0.128] [0.0981]

Constant 1.967*** 1.843*** 1.730*** 2.196***[0.0890] [0.0745] [0.0923] [0.0687]

Observations 1552 1541 1560 1567

First Stage F-Statistic 28.71 24.19 32.08 31.09Standard errors in brackets∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001

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Appendices

A Data description

A.1 Sample Methods

The sample has two parts by design of SOI. The first sampling frame contains all returns filed by

organisations exempt under Internal Revenue Code (IRC) section 501(c)(3). The second frame in-

cludes a pool of all returns filed by organisations exempt under IRC sections 501(c)(4)-(9). These

two samples are then divided into strata based on the size of end-of-year total assets, with each

stratum sampled at a different rate. The exempt organisation sample is aiming to provide reliable

estimates of total assets and total revenue. This is done by sampling 100% of 501(c)(3) organ-

isations with total assets of $50 million or more, as they represent the vast majority of financial

activities in the charitable sector. 501(c)(4) through (9) organisations with assets of $10 millions or

more are included in the sample. The remaining population is randomly selected at various rates,

ranging from about 1% to less than 100% depending on asset size.

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A.2 NTEE Major Categories

Table A.1: Description of NTEE Major Categories

Arts, culture, and humanitiesA Arts, Culture and Humanities

EducationB Education

Environment and animalsC EnvironmentD Animal-Related

HealthE Health CareF Mental Health and Crisis InterventionG Voluntary Health Associations and Medical DisciplinesH Medical Research

Human servicesI Crime and Legal-RelatedJ EmploymentK Food, Agriculture and NutritionL Housing and ShelterM Public Safety, Disaster Preparedness and ReliefN Recreation and SportsO Youth DevelopmentP Human Services

International and foreign affairsQ International, Foreign Affairs and National Security

Public and societal benefitR Civil Rights, Social Action and AdvocacyS Community Improvement and Capacity BuildingT Philanthropy, Voluntarism and Grantmaking FoundationsU Science and TechnologyV Social ScienceW Public and Societal Benefit

Religion-relatedX Religion-Related

Mutual/membership benefitY Mutual and Membership Benefit

Unknown/unclassifiedZ Unknown

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B First Stage Regression Results

Table B.1: First Stage Results of Table 6

(1) (2)Efficiency Price -0.135 -0.106

[0.202] [0.299]

Fund-raising Expenditure 0.353*** 0.389**[0.029] [0.033]

Programme Service Revenue 0.249*** 0.203***[0.020] [0.024]

State GDP 0.557*** 0.478***[0.173] [0.223]

State Unemployment 0.231* 0.278**[0.113] [0.133]

SSI 0.384*** 0.206**[0.108] [0.142]

Budget 0.310** 0.686**[0.136] [0.164]

Observations 1941 1567

F-Statistic 31.09 35.17Government Grant is instrumented with SSI and BudgetColumns 1-2 correspond to Columns 1-2 in Table 6Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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Table B.2: First Stage Results of Table 8

(1) (2) (3)Efficiency Price -0.156 -0.145 -0.170

[0.232] [0.179] [0.158]

Fund-raising Expenditure 0.310*** 0.297*** 0.346***[0.027] [0.035] [0.022]

Programme Service Revenue 0.207*** 0.214*** 0.228***[0.018] [0.037] [0.040]

State GDP 0.524*** 0.497*** 0.573***[0.133] [0.106] [0.148]

State Unemployment 0.201* 0.244* 0.250*[0.104] [0.126] [0.132]

SSI 0.344*** 0.295*** 0.273***[0.092] [0.089] [0.077]

Budget 0.540** 0.402** 0.395**[0.207] [0.195] [0.171]

Observation 1552 1541 1560F-Statistic 28.71 24.19 32.08Instrumented variable is Government Grant. Instruments are SSI and Budget.Columns 1-3 correspond to Columns 1-3 in Table 8Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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C IV regression with interactions

Table C.1: IV with Interactions on Balanced Panel

OLS OLS with fixed effects IV Panel IV Simultaneous Equations

Fundraising Expenditure 0.680*** 0.683*** 0.632*** 0.127** 0.716***[0.014] [0.015] [0.043] [0.064] [0.025]

Efficiency Price -0.317 -0.323 -0.154 0.093 -0.092[0.232] [0.231] [0.094] [0.261] [0.230]

GDP 0.167** 0.166** 0.159* 0.262* 0.260*[0.086] [0.083] [0.87] [0.158] [0.135]

Unemployment Rate 0.112 0.108 0.110 0.132 0.125[0.102] [0.097] [0.077] [0.127] [0.114]

Programme Service Revenue -0.013 -0.012 -0.009 0.072* 0.067*[0.011] [0.018] [0.012] [0.041] [0.039]

Government Grant 0.168** 0.161** -0.104 0.992*** 1.511***[0.078] 0.078] [0.089] [0.183] [0.132]

Arts * Grant -0.130* -0.123 0.311*** -0.937*** -1.700***[0.082] [0.083] [0.102] [0.141] [0.118]

Edu * Grant -0.179** -0.162** 0.125 -0.963** -1.590***[0.082] [0.079] [0.091] [0.217] [0.129]

Env * Grant -0.069 -0.060 0.307*** -0.948*** -1.644***[0.085] [0.081] [0.096] [0.135] [0.126]

Health * Grant -0.081 0.071 0.501* -0.964** -1.711***[0.082] [0.076] [0.276] [0.281] [0.134]

Intl * Grant 0.228*** 0.219*** 0.814*** -0.937** -1.321**[0.079] [0.089] [0.144] [0.295] [0.135]

Public * Grant -0.117* -0.128** 0.089*** -0.932** -1.396***[0.057] [0.051] [0.027] [0.191] [0.145]

Human * Grant -0.057 -0.050 0.438** -0.922*** -1.140***[0.083] [0.080] [0.200] [0.176] [0.201]

Constant 0.209 0.242 0.279 -1.747 -1.189***[0.268] 0.274 [0.130] 1.884 0.407

Observations 1833 1833 1833 1833 1833Time Fixed Effects No Yes No Yes Yes

First Stage Statistics SummaryInstrumented Variable Shea Partial R2 Partial R2 F-Statistic P-Value

Government Grant 0.1993 0.3982 41.03 0.0000Arts*Grant 0.2312 0.2436 47.88 0.0000Edu*Grant 0.1748 0.3264 18.23 0.0000Env*Grant 0.1079 0.1230 17.86 0.0000Health*Grant 0.4297 0.4961 21.68 0.0000Intl*Grant 0.0683 0.1289 10.32 0.0000Public*Grant 0.8011 0.8610 33.95 0.0000Human*Grant 0.0556 0.1008 10.12 0.0000Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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Table C.2: IV with Interactions on Unbalanced Panel

OLS OLS with fixed effects IV Panel IV Simultaneous Equations

Fundraising Expenditure 0.637*** 0.635*** 0.569*** 0.381*** 0.501***[0.013] [0.013] [0.023] [0.028] [0.019]

Efficiency Price -0.171 -0.167 -0.035 -0.064 -0.012[0.156] [0.156] [0.087] [0.134] [0.197]

GDP 0.160** 0.159** 0.152* 0.301* 0.083*[0.078] [0.077] [0.086] [0.186] [0.046]

Unemployment Rate 0.154 0.165 0.122 0.147 0.133[0.094] [0.107] [0.087] [0.102] [0.113]

Programme Servive Revenue -0.018* -0.19** -0.004 0.037** -0.050**[0.010] [0.009] [0.017] 0.021 [0.017]

Government Grant 0.153*** 0.161*** -0.085 0.979*** 1.502***[0.042] [0.042] [0.089] [0.276] [0.142]

Arts * Grant -0.212 -0.027 0.277*** -0.943*** -1.453***[0.046] [-0.047] [0.098] [0.296] [0.127]

Edu * Grant -0.147*** -0.155*** 0.118 -0.977*** -1.425***[0.052] [0.051] [0.088] [0.342] [0.150]

Env * Grant -0.054 -0.062 0.250** -0.901*** -1.409***[0.046] [0.046] [0.103] [0.292] [0.126]

Health * Grant -0.088* -0.098** 0.412* -0.947*** -1.410***[0.049] [0.049] [0.134] [0.323] [0.150]

Intl * Grant 0.171*** 0.165*** 0.768*** -0.716*** -1.304***[0.052] [0.052] [0.128] [0.332] [0.159]

Public * Grant -0.274*** -0.283*** 0.161** -0.921*** -1.377***[0.046] [0.046] [0.126] [0.281] [0.140]

Human * Grant -0.112** -0.119** 1.219*** -0.914*** -1.446***[0.049] [0.050] [0.238] [0.227] [0.167]

Constant 0.181 0.155 0.135 -2.125*** -1.784***[0.229] [0.233] [0.325] [0.676] [0.517]

Observations 2300 2300 2300 2300 2300Time Fixed Effects No Yes No Yes Yes

First Stage Statistics SummaryInstrumented Variable Shea Partial R2 Partial R2 F-Statistic P-Value

Government Grant 0.2503 0.4816 36.59 0.0000Arts*Grant 0.2584 0.2355 25.09 0.0000Edu*Grant 0.1259 0.4105 19.28 0.0000Env*Grant 0.0987 0.1677 14.27 0.0000Health*Grant 0.4148 0.2981 18.81 0.0000Intl*Grant 0.2152 0.2395 13.16 0.0000Public*Grant 0.3722 0.8691 30.53 0.0000Human*Grant 0.1093 0.1875 8.23 0.0000Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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D Replication of Okten and Weisbrod’s 2SLS regression

Table D.1: Replication of IV Regression in Okten and Weisbrod 2000

(1) (2)

Fundraising Expenditure 0.357∗∗∗ 0.384∗∗∗

[0.0314] [0.0621]

Government Grant 0.0224∗ 0.0170∗

[0.00950] [0.0162]

Programme Service Revenue 0.0735∗∗∗ 0.108[0.0210] [0.0556]

Efficiency Price -0.265∗∗∗ -0.183[0.421] [0.379]

Relative Efficiency Price 0.298∗∗∗ 0.271[0.086] [0.201]

Relative Service Provision -0.150∗∗∗ -0.147[0.0452] [0.102]

Constant 0.753∗∗∗ 0.936∗∗∗

[0.0457] [0.0721]

Observations 20567 11345

F-statistic for instruments 14.72 7.37Standard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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Table D.2: First Stage Results of Table D1

(1) (2)Efficiency Price -0.125 -0.098

[0.214] [0.107]

Fund-raising Expenditure 0.152*** 0.147**[0.049] [0.073]

Programme Service Revenue 0.249 0.203[0.208] [0.197]

Lagged Fund-Raising 0.157*** 0.170***[0.053] [0.043]

Lagged Price 0.231 0.278[0.180] [0.223]

Lagged Donations 0.183*** 0.199**[0.033] [0.047]

Lagged PSR 0.103 0.124[0.099] [0.108]

Observations 20567 11345

F-Statistic 14.72 7.37Government Grant is instrumented with lagged variablesStandard errors in brackets∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

57