The Charitable Spending of Private Foundations

Abstract

We evaluate private foundations' responsiveness to recipient needs. Exploiting financial shocks to focal and peer foundations as exogenous shocks to the marginal value of donations, we document novel evidence that foundations adjust their cross-sectional grant allocations in response to recipient needs. However, their total grantmaking does not adjust and exhibits patterns consistent with a preference for capital preservation. Foundations influenced by founding families exhibit more responsive grant allocation but also greater capital preservation tendencies. Board independence does not improve responsiveness. Our results explain why current regulations simultaneously subsidize private foundation funding and mandate minimum spending.

Keywords: private foundations, nonprofit boards, nonprofit governance, charitable spending, agency costs

JEL Classification: G18, G38, L31, M14