Foreign Aid, Government Spending, and Contributions toward Public Goods: Experimental Evidence from the Philippines

Scholars have long argued that government spending crowds out contributions to public goods through taxes or through nonprofit organizations. In developing countries where public goods are often financed by foreign donors, foreign aid may have a similar inhibiting effect. Aid, it is argued, leads citizens to question the legitimacy of their state and reduces their willingness to comply with taxes. Recent studies show that externally funded non-government organizations and programs fail to catalyze collective action as expected. Bringing together these strands of research, we examine whether information on government and/or foreign financing crowds out willingness to contribute to public goods, and explore mechanisms linking the information and individuals’ responses. Using a survey experiment on elite university students in the Philippines, we find that both government spending and foreign aid reduce willingness to contribute to the public good, albeit not uniformly across different modes of engagement. Moreover, we find that individuals are likely to reduce their contributions, not because they view government and foreign financing as perfect substitutes for their contributions, as the classic crowding out thesis suggests, but because they have little confidence that existing resources will be properly disbursed. Our results point to a general lack of confidence in the state as well as other intermediary institutions involved in the implementation of government and aid programs.