Working Paper: CEPR ID: DP7937
Authors: Kimberley Ann Scharf
Abstract: Evidence on the price elasticity of private donations to charities and on the crowding out effect of donations by government grants suggests that a redirection of government funds from tax incentives for giving towards direct grants could increase total charity funding. This raises the question of why tax incentives for giving are used instead of direct grants. This paper shows that if government grants to charities face verification constraints, switching from direct grants to donation incentives can produce a pro-competitive effect on charity selection, raising the value of charity provision per dollar of funding.
Keywords: charities; government funding; market structure of nonprofit organizations; nonprofit organizations and prosocial motivation
JEL Codes: H20; H32; H50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift from direct government grants to tax incentives for private donations (H29) | pro-competitive effect on charity selection (D64) |
| direct grants face verification constraints (H81) | limiting their effectiveness (C92) |
| government grants crowd out private donations (H81) | overall funding can be improved by promoting private giving through tax relief (D64) |
| tax relief lowers the price of giving (D64) | encourages more donations (D64) |
| lack of a price mechanism in the nonprofit sector (L39) | less effective selection compared to for-profit markets (L33) |
| donors leverage ability to condition funding on performance (F35) | improve charity selection (D64) |
| improved charity selection (D64) | higher expected provision of services (H49) |
| private donations enhance efficiency in charity provision (D64) | improved selection of effective charities (D64) |