Flypaper Nonprofits: The Impact of Federal Grant Structure on Nonprofit Expenditure Decisions

This paper examines the behavioral influence of federal grants on nonprofit firms. The topic is of particular concern governments who wish to stimulate the private provision of public services. Recent research shows that grants may inadvertently reduce private sector provision, by causing a reduction in nonprofit fundraising activity. This study extends work on federal grants by examining the differential influence of incentive versus lump-sum style grants on the subsequent expenditures of recipient nonprofit firms. The paper draws detailed grant data from the Federal Assistance Award Data System (FAADS), which includes structural characteristics of the grant. Empirical results demonstrate that the structure of the grant matters a great deal. Though relatively uncommon in the data, incentive grants are particularly effective at stimulating both additional fundraising activity and output of the firm. More widespread use of incentive grants could mitigate the tendency of government grants to reduce private provision of charitable goods.