The crowding‐out effect within government funding: Implications for within‐source diversification

Abstract

The benefits and risks of revenue diversification lead scholars to propose within‐source diversification as a possible compromise. Although this revenue strategy sounds promising, no scholarly attention has been devoted to empirically examining it. This study explores within‐source diversification across government funding, specifically whether nonprofit receipt of support from a major government funder affects support from other government funders. Using a panel dataset of U.S.‐based international development nonprofits from 1995 to 2014, we find that nonprofits with more funding from the major funder are associated with significantly less funding from other funders. This crowding‐out effect weakens as organization size grows. The findings imply that the within‐source diversification strategy might be more desirable for larger organizations with the capacity to manage multiple funding relationships.

Understanding the Effect of Central Government Funding on the Service and Advocacy Roles of Nonprofit Organizations in China: A Cross-Regional Comparison

“…By adopting a government perspective and introducing the notions of leverage strategy and selective empowerment, our study provides a more sophisticated way to understand the characteristics of the government–nonprofit relationship in authoritarian regimes. Interestingly enough, we find that more funding from the central government is associated with significantly more funding from other funding sources—in the form of matching funds—in China, which is inconsistent with the Western countries where nonprofits with more funding from a major government funder are associated with significantly less funding from other founders (J. Zhao & Lu, 2019).…”

Within Source Diversification When the Going Gets Tough: Examining Alterations to Human Service Nonprofit Funding by Levels of Government

“…However, future research may want to delve into potential crowd out effects. For examine, Zhao and Lu (2019) found USAID funding crowded out funding from other federal government agencies for international development organizations. Relatedly, Shea and Wang (2015) find state funding has a negative impact on revenue diversification.…”

Government Funding—Crowding Out

“…They are a substantial resource that can help signal a nonprofit's financial health and encourage more giving-a phenomenon known as the "crowd-in effect" (Steinberg 1991, 592;Grasse, Searing, and Neely 2022) and can enable nonprofits' revenue diversification strategy. However, solely relying on revenue diversification as a mitigation strategy for crowding out is insufficient because crowding out can happen between different revenue sources, for instance, between different government grants (Zhao and Lu 2019), or reverse crowding (e.g., charity spending crowding out government expenditure; Cheng 2019). These interactions are important to assessing the feasibility of mitigation strategies.…”