Money and mission: How nonprofit organizations finance their charitable activities

Charitable nonprofits rely principally on three different sources of external funding—private contributions, government grants and contracts, and federated funds. The three substantive chapters of this dissertation examine different aspects of nonprofit behavior with respect to each of these sources of funding. The first chapter addresses a serious information problem in the nonprofit sector. The problem is that nonprofits are in a better position to observe the quality of their output than are their funders because the flow of information in the market is limited. One possible response is market signaling, in which nonprofits undertake costly actions that are of little or no benefit in their own right to distinguish themselves from one another. This chapter proceeds to develop a theory of nonprofit signaling in the market for federated funds and explores financial performance as a potential signal. It then investigates the welfare properties of the various signaling equilibria from multiple perspectives. Finally, it presents the results of a preliminary analysis of a longitudinal dataset on nonprofit finances. It concludes that financial performance is positively and significantly correlated with federated funding, which is consistent with the existence of nonprofit signaling, but that signaling itself does not necessarily improve social welfare.; The second chapter begins with the observation that, in industries ranging from health care to social services, a defining feature of America's social welfare system is that government provides the funds and that nonprofit organizations deliver the services. It then develops a theory of dynamic market forces to analyze the government-nonprofit funding relationship and uses event history methods to estimate the influence of these forces upon the hazard of forming and dissolving this relationship. The results of the analysis suggest that the two market forces of efficiency and stability significantly influence the birth and death of this relationship. In particular, nonprofits that are perceived to be more efficient and stable are more likely to establish and maintain funding relationships with the government. An additional analysis of the relative magnitudes of change in the two market forces suggests that stability exerts a stronger influence over the hazard of formation and dissolution than efficiency. It concludes that the dynamics of the government-nonprofit funding relationship are not primarily oriented towards efficiency, but rather more towards stability.; The third chapter addresses the question of whether nonprofit efficiency is recognized and rewarded by the private donors that support these organizations. Although increasing competition over scarce resources has resulted in a drive towards improving the efficiency of nonprofit organizations, its role in the contributions marketplace is unclear. The results indicate that nonprofits positioning themselves as efficient—reporting low administrative to total expense ratios—fared no better over time than less efficient appearing organizations in the market for individual, foundation, and corporate contributions. Instead, the analysis suggests that nonprofit expenditures on fundraising are strongly correlated with future contributions. It concludes that strategic positioning around efficiency might not always be the best strategy and that aggressive marketing through increased fundraising may be a more effective means for nonprofits to raise charitable contributions.