Nonprofits, Crowd-Out, and Credit Constraints

In theories of nonprofit behavior where government grants crowd-out private dona-tions, the results hinge on the assumption that the marginal productivity of fund-raising expenditures decreases with government grants. While some research finds that donations fall with government grants, no empirical evidence on how grants affect the marginal pro-ductivity of fund-raising exists. We estimate this relationship directly for US social service organizations and, surprisingly, find that increases in government grants decrease the level of fund-raising expenditures but increase the marginal productivity. This counterintu-itive result can be understood by accounting for intertemporal resource allocation in the presence of credit constraints. We model a NP firm facing crowd-out and show that the response of fund-raising expenditures hinges on the timing of the grants and the sign of the cross-derivative of fund-raising with respect to fund-raising expenditures and government grants. When NPs face borrowing constraints, increases in grants lead to reductions in fund-raising despite the higher productivity because firms reallocate resources over time