Voluntary Donations and Public Expenditures in a Federalist System: Comment and Extension
Abstract
In a recent paper, Richard Steinberg (1987) examines the effects upon private donations of federal and local government spending for a public good. Unfortunately, when discussing the consequences of changes in local spending, he mis-specifies the demand function for donations. This error enables one to conclude from his model that it is a priori impossible for government to crowd out private donations one-for-one. Such a conclusion violates intuition because one-for-one crowding out should be at least theoretically possible. And Steinberg's model-when corrected-does allow donations to fall as much as the government increases its spending, as this comment will show. One can further conclude from the model presented in the body of Steinberg's paper that the structure of the government's tax policy has no effect on the level of crowding out. However, the corrected model implies that the government can influence changes in private donations that are caused by increased government spending. The degree of control depends upon the size of the donors' income effects and upon the ability of the government to allocate the extra tax burden.
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