Jeremy P. Thornton

Nonprofit Fund-Raising in Competitive Donor Markets

Fund-raising expenditures represent an important strategic decision for nonprofit managers in the face of scarced on or resources. Privately, nonprofit managers weigh the trade-off between reaching new donors and increasing the implicit price of output to its constituents. Socially, competition among nonprofit firms for donations may produce an excessive level of fund-raising. This article empirically examines nonprofit fund-raising decisions, privately and socially, under varying market conditions. Analysis of financial data reveals that as markets become more competitive, nonprofits follow their private incentives by reducing their fund-raising expenditures. However, the author finds evidence that, collectively, nonprofits may spend an inefficiently high share of their revenues on fund-raising. As such, the author offers alternatives to the common practice of collective fund-raising through institutions such as the United Way. Implications of the study include increasing price transparency to improve market discipline or raising legal and financial barriers to entry.

Financial reporting quality and price competition among nonprofit firms

Donors increasingly rely on financial information reported by Internal Revenue Service (IRS) Form 990 to allocate donations among nonprofit firms. However, competition among nonprofits creates an incentive for managers to under-report management and fund-raising expenditures to make their firms appear relatively efficient. Increasingly, researchers suspect that information provided in the Form 990 may not accurately portray the true financial condition of nonprofit firms. Inaccurate price information weakens the ability of donors to promote efficiency and discipline excess among nonprofit managers. This article examines the reaction of donors to variation in Form 990 reporting quality. We find that donors reward nonprofit firms for investments in more accurate financial reporting. Additionally, higher quality financial information sharpens the ability of donor markets to discipline nonprofit firms by increasing price sensitivity. The primary implication of this study is that regulatory improvements in reporting quality could increase the ability of donor markets to serve as a viable governance mechanism for improving nonprofit efficiency.

Choosing to give more: experimental evidence on restricted gifts and charitable behaviour

It is common for charitable organizations to allow donors to place material restrictions on their gifts. Nonprofit firms and fundraisers generally believe that allowing gift restrictions will increase donation revenue. Restricted gifts are costly to the nonprofit firms because of increased management expenses and an inability to reallocate gifts to higher valued uses. We report the results of an experiment which tests the influence of charitable gift restrictions on donor behaviour. We find that allowing restricted gifts significantly increases the amount given in a laboratory setting. However, we find no evidence that grant restrictions increase the probability of giving.

Flypaper Nonprofits: The Impact of Federal Grant Structure on Nonprofit Expenditure Decisions

This paper examines the behavioral influence of federal grants on nonprofit firms. The topic is of particular concern governments who wish to stimulate the private provision of public services. Recent research shows that grants may inadvertently reduce private sector provision, by causing a reduction in nonprofit fundraising activity. This study extends work on federal grants by examining the differential influence of incentive versus lump-sum style grants on the subsequent expenditures of recipient nonprofit firms. The paper draws detailed grant data from the Federal Assistance Award Data System (FAADS), which includes structural characteristics of the grant. Empirical results demonstrate that the structure of the grant matters a great deal. Though relatively uncommon in the data, incentive grants are particularly effective at stimulating both additional fundraising activity and output of the firm. More widespread use of incentive grants could mitigate the tendency of government grants to reduce private provision of charitable goods.

Too Many Nonprofits? An Empirical Approach to Estimating Trends in Nonprofit Demand Density

Abstract We examine the claim that nonprofit markets have become more crowded over time. A naïve examination of the data indicates that the number of nonprofits has increased rapidly over the past two decades. However, this approach does not account for increases in population, income, or other demand factors that would alter a population’s ability to support additional nonprofits. We attempt to quantify a standard unit of demand for nonprofits over time, by exploiting the panel nature of our data. Our findings indicate that nonprofit density, normalized for changes in demand, in 2005 is lower than it was in 1990. We are also able to examine the impact of incremental increases in population to absorb a nonprofit. Overall, we find that it takes far more people to support nonprofit entry in 2005 compared to 1990. It is likely that technological shifts in production and management techniques introduced since 1990 allow firms to serve larger numbers of people. Consistent with our findings, this type of change would result in fewer nonprofits per market, serving larger numbers of people. Our results therefore provide evidence that growth in the nonprofit sector has not necessarily implied increased density or greater competition in the sector.

THE EFFECTS OF ORGANIZATIONAL FORM IN THE MIXED MARKET FOR FOSTER CARE

This paper uses proprietary quality of care data to examine the consequences of organizational form in privatized US foster care services. The contract failure hypothesis generically proposes that nonprofits should provide higher quality services, relative to for-profits, when output is costly to observe. Advocates argue that the nonprofits offer important consumer protections when public services are contracted to private agencies. Contrary to expectations, we find that nonprofit firms do not offer higher quality services. We explore the possibility that monitoring efforts by state regulators or competition among foster care agencies effectively mitigate the influence of organizational form in this particular mixed market. Copyright

What Big Data Can Tell Us About Government Awards to the Nonprofit Sector: Using the FAADS

This article reviews the Federal Assistance Award Data System (FAADS), a comprehensive online archive of federal grant activity. Relatively few nonprofit scholars have used this extensive data source due to significant structural limitations in the data. This article aims to describe and mitigate those limitations while stimulating new research on government awards to nonprofits. The article profiles the process of federal award flows and reporting. We also identify the primary advantages and shortcomings in the current data structure. Finally, we post an electronic matching algorithm that links individual federal award records to recipient Form 990 financial data. This process allows researchers to analyze the influence of federal awards with greater fidelity than has been previously accomplished in the literature.

New experimental evidence on charitable gift restrictions and donor behaviour

Gift restrictions are a common tool used by donors to ensure charitable intent. Owing to increased monitoring costs and the loss of flexibility, gift restrictions are costly to the recipient nonprofit organizations. Using an economic experiment, we studied the impact of offering donors the option to restrict their charitable gift. Our primary finding demonstrates that allowing the option to restrict a charitable gift increases the average gift size, whether or not the donor chooses to exercise that option. This result implies that restricted gifts both are an important tool for increasing donations and may be less costly to the nonprofit organizations than originally believed. We further demonstrate that high levels of religious attendance are associated with an increased use of gift restrictions and an increased responsiveness to those restrictions.

Financing Social Enterprise in the Very Long Run

All social enterprises share a common struggle to finance collective goods. Collective goods are notoriously difficult for private firms to produce, because of the incentive for their constituents to defect, or free-ride, on the contributions of others. Because of their historical success, this paper looks toward long-lived religions institutions for strategies to mitigate the collective action problem. We empirically examine the Southern Baptist Convention, which records its efforts to finance international missionary activities since 1935. We test a club good model of adherence. Consistent with the club model, we find that contributions to international missions increase with both religious and secular competition for adherents. We do not find that the specific mechanism for collection within the Southern Baptist matters. We conclude that the club model of organization, where high membership costs are deliberately applied, offers valuable – and counterintuitive – lessons for social enterprises more broadly.

Good Enough for Government Work: When Should Government Hire Nonprofits

Annually, United States federal agencies issue procurement contracts worth five hundred billion dollars. Less than four percent of these were awarded to nonprofit organizations. This paper advances our understanding federal procurement practices by analyzing data from the Federal Procurement Data System. We isolate federal programs that choose between nonprofit and for-profit contractors. We find that the use of nonprofit organizations increases with contract complexity, but far less than theory would predict. We find that agencies may use the cost plus style contract as a substitute for nonprofits. We also identify anomalies where federal agencies may not be using optimal contracting tools.