Flypaper Nonprofits

Abstract

This article examines the influence of federal grants on nonprofit expenditure decisions. The topic is of particular concern for governments who wish to stimulate private provision of public services. Recent research shows that grants may inadvertently reduce private sector provision by causing a reduction in fund-raising effort. This study extends line of inquiry by examining the influence of conditional versus lump-sum-style grants. The article draws detailed grant data from the Federal Assistance Award Data System (FAADS), which includes structural characteristics of the grant. FAADS grant information is combined with a panel of nonprofit financial data. Empirical results demonstrate that, though relatively uncommon in the data, conditional grants are particularly effective at stimulating both additional fund-raising activity and output of the firm. Block-Formula grants appear to significantly reduce both fund-raising and output decisions. The study implies that the use of conditional grants could mitigate crowd-out due to nonprofit management decisions.