Public borrowing or provision can displace private investment or private charity rather than adding to it.
Crowding out is well established in some settings, and its magnitude, mechanism and even direction vary. In charitable funding, studies have found partial crowd-out, effects mediated by reduced fundraising, and in some samples crowd-in.
In practice
- A council opens a free advice service and the three charities providing it lose their donors within two years.
- A firm's new internal design team displaces the agency relationships that were producing better work.
- Possible explanations
- Explanations differ by setting: public borrowing can raise interest rates, public spending can compete for real resources when capacity is full, and public provision can reduce the felt need to give privately.
- In its favour
- The mechanism is well established where capacity is tight, and charitable studies do find partial crowd-out of private giving by public grants.
- Against it
- With slack capacity the financial effect is small or absent, and some studies find crowd-in, where public funding signals that an organisation is worth supporting. Magnitude and direction vary by setting.
- Standing
- Magnitude, mechanism and even direction vary by setting; charitable studies find partial crowd-out, and in some samples crowd-in.
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money