Association for Public Policy Analysis & Management

Recent work has documented the large growth in the nonprofit sector relative to the for-profit and government sector and also relative to the nonprofit sector's trend over time \citep{harrisonlaincz}. This trend spurs questions about why such dynamics have occurred and also whether such growth is optimal from a social perspective. In this paper, we focus on the fact that nonprofits compete for donations in order to infer the value of a particular charity's services. Individuals choose to which nonprofits to donate, leaving nonprofits to compete for this limited resource. The paper therefore explores the relation between NP fundraising and competition and the role of donor generosity in that relationship. We develop a model of nonprofit's simultaneous decisions of entry and efforts allocated toward fundraising.

Using tax return data for nonprofits, we compute the percentage of donations that a firm earns relative to total donations received in that industry (i.e., market share of donations). These market shares are a function of the number of other NPs competing in that industry, demographic characteristics of prospective donors, and other market characteristics. The market share estimation provides insight into the donor decision, but also allows us to predict how, for example, changes in income affect the propensity to donate and subsequently, market shares and potentially community welfare.

Our paper provides a methodology to infer the value of a privately provided public good. Moreover, it provides insight into the strategic fundraising decisions of nonprofits, and structurally investigates those relations. Our current estimates suggest that donors are responsive to the level of fundraising but not to the price of donating associated with increased fundraising. The entry of nonprofits also seems to be consistent with our current notion of social welfare maximization. We hope that continued progress to this paper provides additional insight into the social value of nonprofits.

Harrison, T., & Laincz, C. (2008). Entry and Exit in the Nonprofit Sector. The B.E. Journal of Economic Analysis and Policy, 1-41.