Explaining Unrestricted Giving by Charitable Foundations: A Transaction Cost Approach

41 Pages Posted: 11 Jul 2007 Last revised: 24 Jun 2009

See all articles by Jeremy P. Thornton

Jeremy P. Thornton

Samford University - Brock School of Business

Date Written: March 7, 2007

Abstract

This paper extends a transaction costs framework to the nonprofit sector where information asymmetries are typically acute. I explore the decision of charitable foundations to place material restrictions on grants to nonprofits. Foundations often place constraints on grant use to limit cross-subsidy of projects or ex-post opportunism by nonprofit managers. In contrast, nonprofits prefer fewer restrictions to smooth income across revenue streams or compensate for shifts in demand. The paper utilizes a pseudo panel of 6,000 grant contracts to examine the relationship between the various costs of those restrictions and the observed characteristics of grant contracts. Empirical results confirm received theory that high contracting costs will reduce the probability of grant restrictions.

Keywords: Nonprofit, Grant, Incomplete Contracts, Transaction Costs

JEL Classification: L14, D2

Suggested Citation

Thornton, Jeremy P., Explaining Unrestricted Giving by Charitable Foundations: A Transaction Cost Approach (March 7, 2007). International Journal of Industrial Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=999903

Jeremy P. Thornton (Contact Author)

Samford University - Brock School of Business ( email )

800 Lakeshore Drive
Birmingham, AL 35229
United States
2057262128 (Phone)

HOME PAGE: http://https://www.samford.edu/business/directory/Thornton-Jeremy

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