To implement foreign aid, USAID partners with Private Voluntary Organizations (PVOs), which are U.S.-based 501(c)(3) tax-exempt entities. PVOs receive their revenues from a variety of sources, such as international governments, the U.S. federal government, and private giving. Given that 41 percent of U.S. foreign aid is implemented through PVOs and that government funding constitutes almost a fifth of these organizations’ revenues (McCleary & Barro, 2008), federal contributions are likely key determinants of private giving to PVOs. 

This paper investigates whether government funding to PVOs displaces (i.e., crowds out) or encourages (i.e., crowds in) future private giving, and if so, to what extent. In other words, I ask whether federal and private contributions are substitutes (i.e., crowd-out effect) or complements (i.e., crowd-in effect). From a public policy perspective, crowding out implies government failure because federal spending displaces private giving rather than enhancing social welfare. If, however, government funding to PVOs attracts more private funding, then government contributions are arguably justified. 

Using panel data for 1939-2005, this paper studies the link between government and private funding for PVOs, controlling for PVO efficiency. Among other things, by employing different estimation techniques such as OLS, fixed effects, random effects, and GLS, this paper finds that low levels of government funding attract additional private donations. However, beyond some point, additional government funding displaces private philanthropy, which is consistent with findings from the national/local-level crowd-out studies. My findings also show that that on average, donors do not contribute to PVOs based on information about organizational efficiency. The number of years the organization has been in existence, however, is an important factor, which attracts private philanthropy. It is likely that together with government funding, organizational longevity signals organizational quality or trustworthiness.

References

McCleary, R. M., & Barro, R. J. (2008). Private Voluntary Organizations Engaged in International Assistance. Nonprofit and Voluntary Sector Quarterly, 37, 512-536.

Nunnenkamp, P., & Ohler, H. (2010). Funding, Competition and Efficiency of NGOs: An Empirical Analysis of Non-charitable Expenditure of US NGOs Engaged in Foreign Aid. Center for European, Governance and Economic Development Research Discussion Papers(109).

Nunnenkamp, P., & Ohler, H. (2011). Donations to US based NGOs in International Development Cooperation: How (Un-)Informed Are Private Donors? Center for European, Governance and Economic Development Research Discussion Papers(117), 1-29.