Intersecting Sectors? The Connection Between Nonprofit and Government Spending

In this paper, we articulate that rent-seeking behavior by nonprofit charities and budgetary discretionary behavior by public agents should lead to a positive correlation between nonprofit charity and government spending. Using a large national database of government spending that we merged with charitable spending, we empirically test our research question. Overall, we find a positive correlation between spending by both sectors that is unequivocal and nontrivial, thus supporting the rent-seeking theory of nonprofit charities’ behavior. When we examine spending by the sectors by specific areas of service provision to determine public budgetary reallocation, our results indicate positive associations in legal and judicial services, libraries, and public welfare spending – supporting the rent-seeking explanation. However, we found no correlations between spending by the two sectors in several important areas of service provision, including education, health, hospitals, and housing. The lack of correlation in these areas might be indicative of government failure theory rather than rent-seeking. Importantly, the positive association between charitable and government spending suggests that public spending may increase beyond optimal levels – leading potentially to tax burdens that are greater than necessary, crowding out of private enterprise, and spending patterns that are difficult to alter in light of fiscal shocks.