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Article Excerpt
INTRODUCTION
This paper investigates the mechanism by which the federal government s funding of the arts through the National Endowment for the Arts (NEA) displaces private charitable contributions to non-profit arts organizations. Government funding of the arts has incited contentious political debates since the creation of the NEA in 1965. This particular policy debate is one instance of the debate over the government's ability to increase the supply of a public good. It has been of interest to economists because of the crowding-out hypothesis, whereby a dollar spent by the government crowds out a dollar of private spending on the public good. Embedded in the framework of the crowding-out hypothesis are conjectures about the role that the government should play in providing public goods, be it through lump-sum taxes, proportional taxation, or subsidies to private giving. Gauging the efficacy of the government in affecting the supply of a public good through these distributive functions is an important policy question.
The arts provide an important setting to study crowding out because their production coincides with that of both private and public goods. With a few textbook exceptions, most goods provided by the government confer both public and private benefits. The activity of arts organizations constitutes a public good because they are the conduits through which the NEA seeks its goal of "enrich[ing] our Nation and its diverse cultural heritage [through] supporting works of artistic excellence, advancing learning in the arts, and strengthening the arts in communities throughout the country" (National Endowment for the Arts, 2003). To the extent that arts organizations contribute to the national cultural ethos, their activities comprise a public good. On the other hand, many arts activities are excludable and rival.
Another reason why the arts provide an important setting is that arts organizations are not the passive recipients of private and government contributions. Rather, they willfully and actively raise funds, the intensity of which can be influenced by their receipt of government grants. The response of private donors is, thus, a composite of a direct crowding-out effect and an effect attributable to fund-raising. With larger government grants, individuals may decrease their contributions because government funding is substitutable (to varying degrees) for their own. They may also indirectly decrease if larger government grants crowd out fund-raising expenditures. For both economic theory and public policy, estimating the total effect of government grants on private contributions, inclusive of the effect of fund-raising, as well as the direct crowding-out effect is informative.
This paper exploits the variation in government grants induced by the surprise Republican victory during 1994 mid-term Congressional election in order to obtain estimates of the effect of government grants on both fund-raising and private contributions to arts non-profits. The Republican-controlled Congress reduced the appropriation to the NEA by 40 percent subsequent to their victory. To preview the results, I find that private charitable contributions to arts organizations increased by 50 to 60 cents for every dollar decrease in government grants. There was also a concomitant 25 cent increase in fund-raising expenses when the NEA experienced its budget cuts.
The remainder of the paper is organized as follows. The second section outlines the views on crowding out and the theoretical foundations for relating private donations, government contributions, fund-raising, and the equilibrium supply of a public good. The third through fifth sections present the econometric model, data, and findings, respectively. Finally, the sixth section concludes, draws the implications for policy, and suggests possible avenues for further research.
PREVIOUS RESEARCH AND THEORETICAL BACKGROUND
Estimating the extent of crowding out is important for two main reasons. First, the magnitude of crowding out is an indicator of the government's ability to effectuate an increase in the supply of a public good. Second, the U.S. tax code subsidizes charitable giving, and the optimal subsidy rate on a charitable good depends positively on the magnitude of crowding out (Andreoni, 1990; Saez, 2003).
Previous scholarship on the crowding-out hypothesis has centered around the government's ability to provide public goods, along with individuals' motivations for giving, and has moved in the direction of concluding that government funds partially crowd out private donations. Though earlier theoretical and empirical work (Wart, 1983; Bergstrom, Blume, and Varian, 1986; Roberts, 1984) provided momentum for the view of complete crowding out, more recent work (Kingma, 1989; Andreoni, 1990, 1993; Payne, 1998) questions this perspective based on improved empirical methods and data. An interpretation of the earlier, complete crowd-out literature was that the government's role in providing public goods was quite limited. The more recent, empirical studies primarily map out causal relationships between government and individual donations (Kingma, 1989; Payne, 1998), and test alternative theories of giving (Andreoni, 1993; Ribar and Wilhelm, 2002). (1) According to these studies, because individuals, for whatever reason, do not treat their own and government donations as perfect substitutes, crowding out is partial, in contrast to the empirical results from earlier studies. Consistent with more recent studies, Hungerman (2005) and Gruber and Hungerman (2007) find that government and religious spending on social services are not perfect substitutes for one another. More recent estimates of partial crowding out suggest that the government may not be entirely ineffective at regulating the supply of a public good. (2)
In addition to this general literature on the crowding out of public goods, some recent studies examine the relationship between the NEA and private giving in the arts sector (Brooks, 2000; Smith, 2003; Borgonovi and O'Hare, 2004). Taken together, these studies put forth that government grants to arts organizations leverage, or "crowd in," private donations due to the prestige in and the signalling value of an NEA grant. (3) This paper departs from Brooks (2000), Smith (2003), and Borgonovi and O'Hare (2004), and contributes to the literature, in three ways. First, I rely on a natural experiment to disentangle the simultaneity between government grants and private contributions to arts organizations, which may enable me to answer the causal question of whether the NEA crowds out charitable contributions to the arts. Though earlier work recognizes the importance of doing so, their empirical methodologies do not address that unobserved factors, such as an arts organization's quality, are likely to induce a spurious positive correlation between government grants and private contributions (Brooks, 2000; Smith, 2003; Borgonovi and O'Hare, 2004). Not surprisingly, these earlier studies find that the NEA leverages private donations, a result that may in fact be due to an organization's quality affecting both government grants and private contributions.
Second, I use micro-level data on a panel of arts organizations across all disciplines that file an IRS Form 990 in fiscal years 1995 and 1996. Earlier research estimates the effect of the NEA using particular arts organizations, such as orchestras or dance companies (Brooks, 2000; Smith, 2003), or uses aggregated data (Brooks, 2000; Borgonovi and O'Hare, 2004). Accurately estimating crowding out entails studying the relationship between government grants and private contributions for the same public good, which is accomplished using a panel of arts organizations (see Kingma (1989) for an explanation of why this is a necessary condition). In addition, relating aggregate measures of private contributions to aggregate levels of government grants can be deceptive if the composition of arts organizations or their activities varies over time, as would be the case with the time-series data in Borgonovi and O'Hare (2004).
Finally, as Andreoni and Payne (2003, 2007) emphasize, the fired-raising activities of charities may add another dimension to the crowding-out narrative in that decreased fund-raising efforts, rather than purely a direct behavioral response by individuals, may contribute to the estimates of crowding out. When the government increases its funding of a public good, it is possible to observe a wide range of responses to private contributions when non-profits fund-raise (Andreoni and Payne, 2003). In short, fund-raising allows for two channels by which government grants reduce private contributions. The direct crowding-out effect is the classic mechanism, which holds fixed the fund-raising efforts of non-profits. The indirect crowding-out effect recognizes that non-profits may fund-raise less when presented with larger government grants. This, in turn, further reduces private giving to public goods. The total effect of government grants on private contributions is an amalgam of a direct, crowding-out effect and an indirect, fund-raising effect (Andreoni and Payne, 2003, 2007).
In their empirical work, Andreoni and Payne (2003) find a non-trivial behavioral response by fund-raisers while Andreoni and Payne (2007)...
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