Do grants to charities crowd out other income? Evidence from the UK

doi:10.1016/j.jpubeco.2013.10.005

Journal of Public Economics

Volume 114, June 2014, Pages 75-86

https://doi.org/10.1016/j.jpubeco.2013.10.005 Get rights and content

Abstract

We use a novel identification strategy to shed light on the effect of grant funding. We focus on charities that applied to a UK lottery grant programme. Where charities score the same on formal criteria, it is likely that informal criteria orthogonal to quality are used to break the ties, allowing us plausibly to treat a grant as a random event. We find evidence that grants have a positive impact for smaller charities, increasing their longevity and even crowding in other income.

Introduction

What effect does receiving a grant have on charities' incomes? Does the funding simply substitute for other sources of funding – do donors reduce their giving and/or do charities reduce their fundraising activities – or does the grant have a positive effect, helping charities to survive and thrive? This issue is crucially important for organisations that fund charities and has been a long-standing area of research (see, e.g., Andreoni (1989), List (2011), and Andreoni and Payne (2013) for summaries). The most recent empirical evidence from the US and Canada shows that donations fall when a charity receives a government grant. The research points to a high level of “crowd out” — an extra dollar of funding reduces donations between 80 cents and one dollar on average. The main mechanism underlying this reduction, however, is not that donors respond directly to the grant by reducing their donations but that charities reduce their level of fundraising activity, leading to fewer donations (Andreoni and Payne, 2011, Andreoni and Payne, 2012).

This paper studies this question using a unique sample of all the charities that applied for a grant from a programme funded out of the UK National Lottery ticket proceeds.¹ We employ a standard differences-in-differences approach to identify the effect of grant funding on charity incomes and compare the change in income before and after the funding decision across successful and unsuccessful applicants. The novelty and strength of our analysis lie primarily in the data we use. Our analysis focuses on a sample of relatively homogeneous charities that have all chosen to apply for funding. We track the charities both before and after the funding application. This allows us to control for time-invariant charity-specific characteristics that affect income. Next, we observe the assessment criteria used to award funding and can narrow our analysis to those “marginal” charities that narrowly succeeded to receive funding and those that narrowly failed. Of course, the decision to award a grant is not random; there is a particular concern that it may be correlated with pre-existing trends in charities' incomes. We show that there is no evidence of any differential trends and that the main findings are robust to focusing on “marginal” applications.

We find that being awarded a grant has a positive and significant effect on a charity's total income. In other words, these grants do not crowd out other funding sources. Indeed, for medium-sized charities the data lend some support for there being crowd in — £1 of grant income increases income by more than £1.

Our analysis points to a number of key reasons why our findings differ from previous studies. First, we analyse the effects separately for different-sized charities. We find the strongest evidence of positive effects among smaller charities (with incomes < £1 m a year). The size of the lottery grants varies little by charity size, so it is perhaps not surprising that being awarded a grant has a relatively bigger impact on smaller charities' total incomes and we are able to determine the effect of receiving a grant for smaller charities with greater statistical precision. However, it is also plausible that the effects of the grants are larger for smaller charities that have fewer alternative funding sources for raising similar levels of income.

Second, we show that the positive effect of being awarded a grant persists well beyond the year in which the grant was awarded (and the period over which the grant payments are likely to be made), highlighting the importance of assessing policy impacts over the longer-term. Third, we know something about the type of activities for which charities are typically seeking funding under this programme. Usually grants are for distinct, well defined activities that may be different from a charity's current activities. This is consistent with the idea suggested by Andreoni (1998) that seed funding can crowd in other income.

The plan of the paper is as follows: In the next section, we present a simple framework for thinking about the effect of lottery grant funding on a charity's total income. Section 3 describes the National Lottery good causes funding, and our data, in more detail. Section 4 discusses our empirical strategy and Section 5 presents our main results. Section 6 concludes.

Section snippets

A framework for assessing the effect of grant funding

Our data contain reliable information on charities' total income, including grant income (Y), and the amount of the grant awarded (G₁). Our empirical tests are therefore:

(1)
whether receiving a grant completely crowds out other sources of income: $\frac{dY}{d G_{1}} = 0$ and;
(2)
whether total income increases exactly in line with the increase in grant income, $\frac{dY}{d G_{1}} = 1$ , or whether it increases more or less pound-for-pound, which allows us to say something about whether there is crowd in versus crowd out.

To think about

National lottery funding

This section describes the “good causes” programme of the UK National Lottery, and how grant applicants for the funds are scored and selected. We explain how we exploit this setting to identify the effect of grant funding on charity incomes. We also describe how the information from applications was matched with the panel data on charities' incomes and expenditures.

Testing for crowd out

We first estimate a basic difference-in-differences specification to examine whether successful charities have higher incomes after the award decision: $ln y_{it} = α + β_{1} {Post}_{it} + γ_{1} {Award}_{it} + ϕ_{t} + v_{i} + ε_{it}$ where ln y_it is log total income of charity i in period t (including income from grants), Post_it is an indicator variable equal to one if the charity is observed in a period after the committee met to take a decision on its application, Award_it is an indicator variable equal to one if the observation comes

Testing for crowd in

Our second specification extends the analysis to incorporate information on the amount of grant income awarded: $y_{it} = α + η_{s} \sum_{s = 0}^{4} D_{i (t + s)} + λ_{s} \sum_{s = 0}^{4} A_{i (t + s)} \times {Amount}_{i} + ϕ_{t} + v_{i} + ε_{it}$ where y_it is total income (in pounds) of charity i in period t (including income from grants). As before, D_i(t + s) and A_i(t + s) are sets of indicators for each of four years after the funding decision and award of grant respectively, while Amount is equal to the amount (in pounds) that the charity was awarded if successful. In this model,

Discussion and conclusions

This paper has provided new evidence on the effect of grant funding on charities' incomes. We adopt a novel approach, exploiting information on a panel of charities that applied for lottery funding. Overall, we find that grants do not crowd out other sources of income. This contrasts with previous studies where levels of crowd out are high. One plausible story is that the programme typically funded new, discrete activities for which charities may not seek alternative funding. Our analysis also

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^☆: We are very grateful to the editors and two anonymous referees for their comments, to Renu Verma and Sarah Mistry for providing us with the data and for helpful discussions about the operation of Big Lottery and its predecessor, the Community Fund, and to David Clifford and the Third Sector Research Centre for providing us with the Charity Commission data. Edmund Wright provided excellent research assistance. Funding for this research was provided by the Economic and Social Research Council through the Centre for Market and Public Organisation and the Capacity Building Cluster on the Economic Impact of the Third Sector (co-funded by the Office of the Third Sector and the Barrow Cadbury Trust).

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Do grants to charities crowd out other income? Evidence from the UK☆

Abstract

Introduction

Section snippets

A framework for assessing the effect of grant funding

National lottery funding

Testing for crowd out

Testing for crowd in

Discussion and conclusions

J. Public Econ.

J. Public Econ.

J. Public Econ.

J. Public Econ.

Giving with impure altruism: applications to charity and Ricardian equivalence

J. Polit. Econ.

Impure altruism and donations to public goods: a theory of warm-glow giving

Econ. J.

Towards a theory of charitable fundraising

J. Polit. Econ.

Do government grants to private charities crowd out giving or fund-raising?

Am. Econ. Rev.

Is crowding out due entirely to fundraising? Evidence from a panel of charities

J. Public Econ.

Crowding-out charitable contributions in Canada: new knowledge from the North

Charitable giving