Association for Public Policy Analysis & Management

The sizes or densities of the nonprofit sector (NPS) vary across sectors and jurisdictions substantially (Boris and Steuerle, 1999; Liu, 2016). To explain the presence and size variation of the NPS and consequently better understand its social role and relationship with other sectors, researchers develop theories from varied perspectives. One line of reasoning focuses on the linkage between government and NPS activities, utilizing either government failure or interdependence theory (Matsunaga & Yamauchi, 2004; Salamon & Anheier, 2005; Ben-Ner & Van Hoomissen, 1991). Both theories emphasize resource mobilization but make substantively different predictions about the interconnectivity between public and nonprofit sectors (Lecy and Van Slyke, 2013). Whereas government failure theory views the NPS as a supplement to the public sector to meet demands unsatisfied by governmental services, interdependence theory portrays the NPS as a collaborator of governments in the production and delivery of public services.

Empirical studies commonly rely on regional (counties, states or countries) variation to test the two theories. Researchers test hypotheses derived from government failure theory through the explanatory power of population heterogeneity (Corbin, 1999; James, 1987; Kim, 2012; Liu, 2016) and the government’s capacity to satisfy a population’s demands for public services. The size (Ben-Ner and Van Hoomissen, 1992; Kim, 2015; Lecy and Van Slyke, 2013; Matsunaga and Yamauchi, 2004; Paarlberg and Gen, 2009), efficiency (Abzug and Turnheim, 1998; Liu, 2016) and diversity (Liu, 2016) of government services are used to capture the government’s capacity to satisfy residents’ demands. On the other hand, researchers test interdependence theory by examining the relationship between government support (including government grants and other revenue derived from government funded programs) to the NPS and the density of the NPS (Lecy and Van Slyke, 2013).

The aforementioned empirical studies use OLS regressions in their tests of the two theories. While they provide insight on the government-nonprofit sector relationship, these cross-jurisdiction analyses are hampered by the potential of inter-jurisdictional dependence in the variables of interest. We utilize U.S. county level data for the period between 1998 and 2003 to jointly test government failure theory and interdependence theory by overcoming the issues of spatial interdependence. We use Spatial Durbin Regression models that incorporate spatial autocorrelation on both the dependent and explanatory variables. Preliminary results suggest spatial autocorrelation exist in all years of data studied, which validates the purpose of our study.

In short, our study examines the government-nonprofit relationship by controlling for two important yet ignored factors: (a) interdependence between nonprofit sectors in neighboring jurisdictions; and (b) spillover of government and nonprofit expenditures and activities to neighboring regions. Overlooking either of the above two types of spatial interdependence might yield biased estimates or even misleading conclusions (Durlauf, 2002).  Our research contributes to the literature by not only controlling for the potential bias introduced by spatial interdependence, but also quantifying the inter-jurisdictional diffusion of nonprofits and spillover of government activities on NPS.