The Cost of Public Financing: Crowding Out in the Context of Political Campaigns

While economists have extensively studied crowing out in the context of donations to charity, the question of whether public financing for political campaigns crowds out private donations remains unanswered. Seattle’s Democracy Vouchers program, which provides public financing for municipal campaigns in the form of vouchers that registered voters can donate to campaigns, provides a unique setting that I use to answer this question. In this paper, I use difference-in-differences to study the extent of crowding out resulting from Democracy Vouchers. I estimate that each dollar of government spending reduced private contributions by about $0.29. The program increases total campaign contributions and expenditures and small donations while decreasing large donations. Crowding out was incomplete, indicating that public financing can substantially increase total campaign funding and that donors behave similarly in political and charitable settings.