Are Governments Better than Donors at Rewarding Nonprofit Performance?

Abstract

Nonprofits engaged in social production can receive funding from both donors and governments. Much of the nonprofit performance theory is based in economic organization literature and suggests that donors are unlikely to base donation decisions on nonprofit production, But governments may prioritize performance in nonprofit funding decisions. Using rare internal production reports from the nonprofit housing sector and dynamic panel data analysis, this study compares the effects of performance on donor and government funding. We find that a 1% increase in production increases donations by only 0.09%, but increases government funding by 0.32%. Governments are less sensitive than donors to problematic financial ratios and also seem to be better at observing and rewarding nonprofit performance than donors. Governments are also much more responsive to donations than donors are to government funding. Findings indicate that donors face more costs in observing performance than nonprofits do in sharing it, and that future scholarship in both public and nonprofit management should consider that government might have a unique advantage as nonprofit principals.