Does Government Funding Change Behavior? An Empirical Analysis of Crowd-Out

When governments introduce programs or funding for initiatives that are partially provided by lower levels of governments or in the private or third sectors, should the government be concerned about whether its efforts are crowded out by changes in behavior by individuals and institutions participating in the provision of this good or service? The bulk of the theoretical literature suggests that crowd‐out is an issue. The (historic) bulk of the empirical literature, however, has failed to find a measurable crowd‐out effect. With better data and more sophisticated empirical techniques, there is a burgeoning literature that shows that crowd‐out exists. The purpose of this paper is to examine the recent literature that studies the issue of crowd‐out across a variety of venues to understand better the empirical estimation issues as well as the institutional details that can lead to a better understanding of the effects of government programs on individuals and organizations.