Does Government Funding Make Nonprofits Administratively Inefficient? Revisiting the Link

TY - JOUR

T1 - Does Government Funding Make Nonprofits Administratively Inefficient? Revisiting the Link

AU - Lu, Jiahuan

AU - Zhao, Jianzhi

N1 - Funding Information: The authors thank David Strong for providing the VolAg Report data for this study. The authors are also indebted to Editor Susan Phillilps and the four reviewers for their valuable comments on drafts of this article. The author(s) received no financial support for the research, authorship, and/or publication of this article. Publisher Copyright: © The Author(s) 2019.

PY - 2019/12/1

Y1 - 2019/12/1

N2 - 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.

AB - 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.

KW - administrative efficiency

KW - administrative expense ratio

KW - government funding

KW - government–nonprofit relations

UR - http://www.scopus.com/inward/record.url?scp=85068589486&partnerID=8YFLogxK

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U2 - https://doi.org/10.1177/0899764019859435

DO - https://doi.org/10.1177/0899764019859435

M3 - Article

SN - 0899-7640

VL - 48

SP - 1143

EP - 1161

JO - Nonprofit and Voluntary Sector Quarterly

JF - Nonprofit and Voluntary Sector Quarterly

IS - 6

ER -