Does external funding of academic research crowd out institutional support?

Nonprofit organizations receive revenues from a variety of sources. The amount of support provided by each source is often dependent on the level supplied by the other(s). Empirical evidence regarding crowding out among alternative sources of revenue in nonprofit organizations is mixed, but most studies find that an increase in funding from one of the sources tends to decrease contributions from the other(s). This paper investigates the relationship between internal and external funding of academic research. I find evidence that there is not crowding out in this case. Instead, additional funding from each of these sources enhances the amount provided by the other over time. This is consistent with the hypothesis that external sponsors wish to allocate funding to those universities that do the highest quality research, and that funding from either source provides information about quality. The results of this study also imply that a one-time change in funding from one source has a multiplier effect on subsequent levels of both sources. The potential for feedback effects is usually ignored in studies of this type, meaning that the total impact of funding changes may often be understated. This suggests that relatively small decreases in academic research funding can have a larger-than-anticipated effect that may persist for many years. The presence of feedback effects also indicates that existing models of nonprofit behavior, which are primarily static, need to be modified to incorporate a dynamic structure.