Nonprofits, Crowd-Out, and Credit Constraints

We introduce a model of an infinitely-lived nonprofit organization facing donor crowd-out by government grants and credit constraints. The nonprofit chooses the optimal allocation of resources over time between providing service and fund-raising activities. We show that the response of fund-raising expenditures to grants not only hinges on the effect of grants on the productivity of fund-raising as in static models, but depends critically on the timing of grants and credit market access. When nonprofits face credit constraints, increases in future grants lead to reductions in fund-raising because nonprofits reallocate resources over time. In previous nonprofit theories of crowd-out, a negative relationship between grants and fund-raising expenditures follows from an assumption that the marginal productivity of fund-raising expenditures decreases with government grants. In contrast we provide robust empirical evidence that government grants increase the marginal productivity of fund-raising, which is inconsistent with the key assumption of those theories. Moreover, we provide strong evidence of intertemporal resource allocation with limited credit access as predicted in our theoretical model. We discuss why the distinction matters for policies supporting nonprofit public good provision.