Does Government Funding Make Nonprofits Administratively Inefficient? Revisiting the Link

Abstract

There is widespread concern that government funding bureaucratizes nonprofits and causes them to be administratively inefficient. This study brings together contrasting streams of literature and hypothesizes a curvilinear relationship between government funding and nonprofits’ administrative efficiency. Using a longitudinal dataset of U.S. Agency for International Development (USAID)-registered nonprofits, we find evidence for this nonlinear effect. In particular, as the proportion of a nonprofit’s government funding increases, its reported administrative expense ratio will initially increase, but after the proportion reaches one third to two thirds of total revenue (depending on the estimation strategy used), further increases in government funding reduce the reported administrative expense ratio. Nonprofits may maintain a favorable level of operating efficiency with either a low level or a high level of dependence on government funding. Our work adds to the literature on government–nonprofit funding relationship and offers practical implications for nonprofit management.

La relación entre la administración pública y el tercer sector guipuzcoano a debate ¿uno o varios modelos ante la heterogeneidad del sector?

“…Finalmente, la creciente función del sector en los sistemas de bienestar parece ir de la mano de una creciente dependencia de la financiación pública, lo que, siguiendo a Lu & Zhao (2019) plantea al menos dos retos gerenciales: en primer lugar, como asegurar financiación pública estable, tanto para las grandes entidades como para las pequeñas; y por el otro, cómo gestionar la dependencia que esto genera. En definitiva, avanzar tanto en el papel de agente social de las entidades podría potenciar las que son identificadas como dos de las principales funciones del sector: continuar siendo intermediarias y representantes de las necesidades de los sectores más vulnerables, y apoyar y complementar la acción pública para desarrollar un sistema de atención lo más completo y profesionalizado posible.…”

Not-for-Profit Performance Reporting: A Reflection on Methods, Results and Implications for Practice and Regulation

“…Conversely, Ecer et al's (2017) much larger US study of 97,040 Form 990 4 returns for 2003 found larger charities more efficient on the same measure. They noted a relationship between fundraising source and efficiency, as did Lu and Zhao (2019), conducting content analysis of 704 organisations' financial statements filed with the US Agency for International Development (US AID) (1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014). They identified a curvilinear relationship: voluntary organisations' 'operating efficiency' (as indicated by low administrative expenses) could occur with low or high levels of government funding.…”

Not-for-Profit Organizations: A Multi-Disciplinary Review and Assessment From a Strategic Management Perspective

“…For example, Lu (2015) showed that a greater bureaucratic tendency, domain consensus with the government, and longer funding history, increase government funding. Lu and Zhao (2019) found an inverted U-shaped relationship between government funding and NFP administrative efficiency. The conventional concern that government funding hurts NFPs' administrative efficiency (as NFPs need to devote substantial resources to fulfill the funding requirements) receives limited support from this study.…”