Does government spending crowd out voluntary labor and donations?
There is little evidence that government spending crowds out private charitable donations of time and money
RWI, and IZA, Germany
Private charitable contributions play an essential role in most economies. Despite the existence of welfare states, people contribute money and supply volunteer labor to charity. From a policy perspective, there is concern that comprehensive government spending might crowd out these private charitable donations. If perfect crowding out occurs, then every dollar spent by the government will lead to a one-for-one decrease in private spending, leaving the total level of welfare unaltered. Understanding the magnitude and causes of crowding out is crucial, as it represents a hidden cost to public spending and can thus have significant impacts on public welfare.
If people are only concerned with the total level of welfare provided, they will treat government spending as a perfect substitute for their own donations.
Crowding-out behavior is observed in laboratory experiments, which show that tax-financed contributions largely crowd out individuals' charitable contributions.
Even if crowding out is small, potential negative consequences of a reduction in private philanthropy have to be considered.
The decision to contribute privately is determined by many other factors beyond the total level of welfare, such as the individual's desire for earning respect or social prestige, or the utility derived from the act of giving itself.
Apart from the laboratory setting, there is hardly any empirical evidence to suggest that government spending largely crowds out individual charitable behavior.
Studies based on micro-level data from charities as well as studies using regional or cross-country variation in private and public spending usually find small or incomplete crowding-out effects, or even some evidence of a crowding-in effect.
The empirical evidence investigating whether public spending crowds out private charitable donations is mixed. A number of studies find significant but small crowding-out effects, while others find no effects or even evidence of a crowding-in effect. Hence, while crowding out might exist, it is far from being perfect. Policymakers should therefore acknowledge that their own expenditure on social welfare influences private spending. However, they should not be too concerned that an increase in government spending will largely crowd out private contributions of time and money.
private philanthropy, time and money donations, government spending, crowding out
Fairness and motivation
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Andreoni and Payne (2013)
Andreoni, J., Payne, A. "Charitable giving" In: Auerbach, A. J., Chetty, R., Feldstein, M., Saez, E. (eds). Handbook of Public Economics. Volume 5. Amsterdam: Elsevier, 2013.
Schokkaert (2006)
Schokkaert, E. "The empirical analysis of transfer motives" In: Kolm, S. C., Ythier, J. M. (eds). Handbook of the Economics of Giving, Altruism and Reciprocity. Volume 1. Amsterdam: Elsevier, 2006.
[1] Boberg-Fazlic and Sharp (Forthcoming)
[1]Boberg-Fazlic, N., Sharp, P. "Does welfare spending crowd out charitable activity? Evidence from historical England under the poor laws" The Economic Journal (Forthcoming).
[1]Report from the Committee on Charitable Donations
[2] Bauer et al. (2013)
[2]Bauer, T., Bredtmann, J., Schmidt, C. M. "Time vs. money: The supply of voluntary labor and charitable donations across Europe" European Journal of Political Economy 32 (2013): 80–94.
[1]European Social Survey
Denmark, Finland, Norway, Sweden, Austria, Belgium, Germany, France, Luxembourg, Netherlands, Ireland, United Kingdom, Greece, Italy, Portugal, Spain, Hungary, Poland, Slovenia, Switzerland, Israel, Czech Republic
[3] Roberts (1984)
[3]Roberts, R. "A positive model of private charity and public transfers" Journal of Political Economy 92:1 (1984): 136–148.
[1]American Association of Fundraising Counsel
Micro-level analysis - Simulations
[4] Duncan (1999)
[4]Duncan, B. "Modeling charitable contributions of time and money" Journal of Public Economics 72:2 (1999): 213–242.
[1]National Study of Philanthropy
[5] Andreoni (1990)
[5]Andreoni, J. "Impure altruism and donations to public goods: A theory of warm-glow giving" The Economic Journal 100:401 (1990): 464–477.
[6] Glazer and Konrad (1996)
[6]Glazer, A., Konrad, K. A. "A signaling explanation for charity" American Economic Review 86:4 (1996): 1019–1028.
[7] Bolton and Katok (1998)
[7]Bolton, G., Katok, E. "An experimental test of the crowding out hypothesis: The nature of beneficent behavior" Journal of Economic Behavior & Organization 37:3 (1998): 315–331.
[1]Data set from Bolton and Katok (1998)
[1]Experimental data (Micro data): Laboratory experiments - Cross section
Micro-level analysis - Correlation
[8] Khanna and Sandler (2000)
[8]Khanna, J., Sandler, T. "Partners in giving: The crowding-in effects of UK government grants" European Economic Review 44:8 (2000): 1543–1556.
[1]Charities Aid Foundation data
[9] Ribar and Wilhelm (2002)
[9]Ribar, D., Wilhelm, M. "Altruistic and joy-of-giving motivations in charitable behavior" Journal of Political Economy 110:2 (2002): 425–457.
[1]Voluntary Foreign Aid Programs, U.S. Agency for International Development (USAID)
[10] Andreoni and Payne (2011)
[10]Andreoni, J., Payne, A. A. "Is crowding out due entirely to fundraising? Evidence from a panel of charities" Journal of Public Economics 95:5–6 (2011): 334–343.
[1]Urban Institute's National Center for Charitable Statistics
[11] Hackl et al. (2010)
[11]Hackl, F., Halla, M., Pruckner, G. J. "Volunteering and the state" Public Choice 151:3 (2010): 465–495.
[1]World Values Survey
[2]European Values Survey
Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, United Kingdom, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, United States
[12] Eckel et al. (2005)
[12]Eckel, C., Grossman, P., Johnston, R. "An experimental test of the crowding out hypothesis" Journal of Public Economics 89:8 (2005): 1543–1560.
[1]Data set from Eckel et al. (2005)
[13] Crumpler and Grossman (2008)
[13]Crumpler, H., Grossman, P. "An experimental test of warm glow giving" Journal of Public Economics 92:5 (2008): 1011–1021.
[1]Data set from Crumpler and Grossman (2008)
Abrams and Schmitz (1986)
Abrams, B., Schmitz, M. D. "The crowding-out effect of governmental transfers on private charitable contributions: Cross-section evidence" National Tax Journal 37:4 (1986): 563–568.
Bielefeld et al. (2005)
Bielefeld, W., Rooney, P., Steinberg, K. "How do need, capacity, geography, and politics influence giving?" In: Brooks, A. C. (ed). Gifts of Time and Money: The Role of Charity in America's Communities. Volume 1. Lanham, MD: Rowman & Littlefield, 2005.
Böhnke et al. (2013)
Böhnke, T., Massarrat-Mashhadi, N., Silaff, C. "Charitable giving in the German welfare state: Fiscal incentives and crowding out" Public Choice 154:1 (2013): 39−58.
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Chan et al. (2002)
Chan, K., Godby, R., Mestelman, S., Muller, R. "Crowding-out voluntary contributions to public goods" Journal of Economic Behavior & Organization 48:3 (2002): 305–317.
Feldman (2010)
Feldman, N. "Time is money: Choosing between charitable activities" American Economic Journal: Economic Policy 2:1 (2010): 103–130.
Garrett and Rhine (2010)
Garrett, T., Rhine, R. "Government growth and private contributions to charity" Public Choice 143:1–2 (2010): 103–120.
Gronberg et al. (2012)
Gronberg, T. J., Luccasen, A. R., Turocy, T. L., Van Huyck, J. B. "Are tax-financed contribution to a public good completely crowded-out? Experimental evidence" Journal of Public Economics 96:7 (2012): 596–603.
Gruber and Hungerman (2007)
Gruber, J., Hungerman, D. M. "Faith-based charity and crowd-out during the great depression" Journal of Public Economics 91:5 (2007): 1043–1069.
Heutel (2012)
Heutel, G. "Crowding out and crowding in of private donations and government grants" Public Finance Review 42:2 (2012): 143–175.
Payne (2001)
Payne, A. A. "Measuring the effect of federal research funding on private donations at research universities: Is federal research funding more than a substitute for private donations?" International Tax and Public Finance 8:5–6 (2001): 731–751.
Simmons and Emanuele (2004)
Simmons, W. O., Emanuele, R. "Does government spending crowd out donations of time and money?" Public Finance Review 32:5 (2004): 498–511.
Stadelmann-Steffen (2011)
Stadelmann-Steffen, I. "Social volunteering in welfare states: Where crowding out should occur" Political Studies 59:1 (2011): 135–155.
van Ingen and van der Meer (2011)
van Ingen, E., van der Meer, T. "Welfare state expenditure and inequalities in voluntary association participation" Journal of European Social Policy 21:4 (2011): 302–322.
van Oorschoot and Arts (2005)
van Oorschoot, W., Arts, W. "The social capital of European welfare states: The crowding out hypothesis revisited" Journal of European Social Policy 15:1 (2005): 5–26.
Warr (1982)
Warr, P. "Pareto optimal redistribution and private charity" Journal of Public Economics 19:1 (1982): 131–138.
Boberg-Fazlic, N., Sharp, P. "Does welfare spending crowd out charitable activity? Evidence from historical England under the poor laws" The Economic Journal (Forthcoming).
Bauer, T., Bredtmann, J., Schmidt, C. M. "Time vs. money: The supply of voluntary labor and charitable donations across Europe" European Journal of Political Economy 32 (2013): 80–94.
Roberts, R. "A positive model of private charity and public transfers" Journal of Political Economy 92:1 (1984): 136–148.
Duncan, B. "Modeling charitable contributions of time and money" Journal of Public Economics 72:2 (1999): 213–242.
Andreoni, J. "Impure altruism and donations to public goods: A theory of warm-glow giving" The Economic Journal 100:401 (1990): 464–477.
Glazer, A., Konrad, K. A. "A signaling explanation for charity" American Economic Review 86:4 (1996): 1019–1028.
Bolton, G., Katok, E. "An experimental test of the crowding out hypothesis: The nature of beneficent behavior" Journal of Economic Behavior & Organization 37:3 (1998): 315–331.
Khanna, J., Sandler, T. "Partners in giving: The crowding-in effects of UK government grants" European Economic Review 44:8 (2000): 1543–1556.
Ribar, D., Wilhelm, M. "Altruistic and joy-of-giving motivations in charitable behavior" Journal of Political Economy 110:2 (2002): 425–457.
Andreoni, J., Payne, A. A. "Is crowding out due entirely to fundraising? Evidence from a panel of charities" Journal of Public Economics 95:5–6 (2011): 334–343.
Hackl, F., Halla, M., Pruckner, G. J. "Volunteering and the state" Public Choice 151:3 (2010): 465–495.
Eckel, C., Grossman, P., Johnston, R. "An experimental test of the crowding out hypothesis" Journal of Public Economics 89:8 (2005): 1543–1560.
Crumpler, H., Grossman, P. "An experimental test of warm glow giving" Journal of Public Economics 92:5 (2008): 1011–1021.