Association for Public Policy Analysis & Management

Recent scholarship has engaged institutional economics and management science to test the assumptions of conventional wisdom in nonprofit management (Mitchell & Calabrese, 2018). Among these questions is the degree to which donors observe and value nonprofit performance (Mitchell & Calabrese, 2019). Prior evidence that donors respond to nonprofit efficiency is mixed, but most empirical investigations use administrative or overhead ratios as measures of efficiency (Frumkin & Kim, 2001; Tinkelman & Mankaney, 2007).

Overhead and administrative ratios have largely been debunked as measures of nonprofit efficiency. Overhead ratios measure only what nonprofits spend on operational costs relative to other costs, not what nonprofits do or make with what they spend. Furthermore, overhead ratios assume that operational spending is inefficient and unnecessary. Valid measures of nonprofit efficiency should measure the degree to which nonprofits produce with the resources they use (Coupet & Berrett, 2019). Thus, much of the evidence of donor responsiveness to efficiency uses a problematic and invalid measurement of nonprofit efficiency. This is important not just methodologically, but also theoretically: foundations and donors can observe the overhead ratio, but valid measures of organizational efficiency will largely be unobservable to potential donors.

Using panel data and production reports from the nonprofit housing sector, this paper tests donor’s responsiveness to nonprofit efficiency. This study models efficiency both non-parametrically with Data Envelopment Analysis (DEA) and econometrically with Stochastic Frontier Analysis (SFA), then uses dynamic panel models to measure if donors respond to nonprofit efficiency.

This study fits broadly into a larger effort to revisit conventional wisdom about nonprofit management by integrating management science into nonprofit management empirical designs. Specifically, the findings might inform both nonprofit management theory and practice. These results could add empirical evidence to recent questions about the institutional assumptions of donors and organizations in the nonprofit sector.