Does Government Spending Influence Charitable Contributions or Vice Versa?

Essays on Intergovernmental Fiscal Relationship

“…This paper empirically tests the suggestion by Garrett and Rhine (2007) that charitable donations could be an important factor in explaining the difference in the proportion of federal welfare grants to U.S. states. Garrett and Rhine (2007) show that as more private contributions flow to charitable institutions as a result of increased fundraising efforts, these institutions reduce their efforts to obtain federal grants with the consequence that federal fund to the institutions decrease. In the empirical model set up below, I expect that as a state receives more charitable donations, the amount of federal grants/transfers it receives for welfare spending decreases (perhaps as a result of reduced effort to obtain such federal funding).…”

“…Heutel (2010) provides evidence that in regressions estimating the effect of private donations on government grants, the coefficient is not significantly different from zero. Likewise, Garrett and Rhine (2007) use co-integration tests to test for long-run relationships between several categories of both charitable giving and government spending. They also carried out Granger causality tests to find out about the direction of causality in the short-term link that connects government spending to charitable giving.…”

“…They also carried out Granger causality tests to find out about the direction of causality in the short-term link that connects government spending to charitable giving. Granger causality allowed Garrett and Rhine (2007) to examine not only how government spending influences charitable giving, but also to look at the possibility that charitable giving can influence government spending.…”

“…Using time-series (for the period of 1965 to 2003) from the United States, Garrett and Rhine (2007) show that a decrease in aggregate state and local education spending leads to an increase in charitable donations that goes to the education sector, which in turn, leads to a decrease in federal spending on education.…”

“…Much of the work on the magnitude of the crowding out of private charitable contributions by government spending has found that though there is a crowding-out effect it is less than perfect. However, there are very few papers (Garrett & Rhine, 2007;Heutel, 2010;Sav, 2012) that try to identify the direction of the causal link that connects charitable donation and government spending, and hypothesize that causality is such that it is charitable donations that affect government spending. The mechanism suggested here is that a reduction in charitable giving may cause fundraisers to seek additional funding from other sources, namely the government.…”