Nonprofit Resource Allocation Decisions: A Study of Marginal versus Average Spending

Abstract

Charitable organizations are often evaluated by donors and regulators based on various efficiency ratios, including the program ratio. We explore whether charities conform to donor pressure to maintain or improve program ratios when allocating resources. We use a sample of 5,626 charities between 1986 and 2007 and compare marginal spending patterns to average spending patterns in the prior period when budgets change. We provide evidence that in most instances, spending patterns do not change when budget increases are less than fifteen percent. That is, program ratios do not change on average. However, the paper documents that small charities, those that rely little on contributions, charities not funded by the government, and organizations that do not fundraise make resource allocation decisions that decrease the program ratio when budgets increase. These findings provide evidence that some charities feel less pressure to conform to donor pressure than others. We find that when budgets decrease, charity managers make resource allocation decisions that decrease the program ratio. This asymmetry suggests that charity managers are more willing to report declining program ratios when budgets decrease but not improve program ratios when budgets increase.

Keywords: Charity, Nonprofit, Efficiency, Program Ratio, Marginal Spending

JEL Classification: H39, L31, M41