How Do Nonprofits Use Cash Windfalls? Evidence from $5B in Unrestricted Donations

Abstract

Most large donations to 501(c)(3)’s are given with restrictions on use. Whether restrictions fuel a “nonprofit starvation cycle” that reduces charitable productivity remains an open question. To test this hypothesis, I develop a corporate-finance model of nonprofits and exploit $5B of MacKenzie Scott's unrestricted gifts as a natural experiment. Comparing 642 recipients to matched nonrecipients with difference-in-differences, I find recipients attracted additional donations, spent the entire gift within two years, and disbursed 3% of new spending as executive compensation. The results are consistent with use-restrictions constraining executive pay and cast doubt on the starvation cycle hypothesis.

Keywords: charitable giving, nonprofit operations, capital budgeting

JEL Classification: L31, G31, G35, H41