A Hindrance on Organizations? Understanding Restricted Funding and Nonprofit Efficiency

• In Event: Third sector performance

Abstract

This study aims to understand the effect of restricted funding on nonprofit efficiency. To ensure nonprofits meet their expectations, many funders specify exactly how, when, and what their funding should be spent on. Restricted funding is ubiquitous in the nonprofit sector. However, it is not always welcome by nonprofit managers. Nonprofit managers argue that there are actually many benefits to more unrestricted forms of funding. For instance, unrestricted funding increases nonprofit flexibility to deal with external shocks, helps nonprofit service delivery, and increases innovation at nonprofits (Hung, 2021; Hung & Berrett, 2021; Wiepking & De Wit, 2020; Wiepking & De Wit, 2023). Despite that there is a heated discussion on the effect of restricted funding, little is known about whether restricted funding is a hindrance to nonprofit efficiency. Efficiency is important to nonprofits for several reasons (Berrett & Hung, 2023). First, donors care about how nonprofits allocate their resources. Thus, nonprofits perceived by donors as efficient may be able to receive more contributions (Charles et al., 2020). Second, efficient nonprofits tend to be more productive since they know how to minimize inputs for producing the most outputs (Coupet & Berrett, 2018). Productive nonprofits are more likely to fulfill their missions. Finally, efficient nonprofits tend to be resilient organizations because they know how to quickly bounce back from unexpected crises by better using resources, connections, and networks.

This study looks at the effect of restricted funding on nonprofit efficiency using a sample of U.S.-based Habitat for Humanity affiliates from 2010-2016. Specifically, data for this study come from three sources: 1) Habitat for Humanity provided the production and Geographic Service Area data; 2) Candid provided the financial data from Form 990; and 3) Zillow provided home value data. The dependent variable in this study is organizational efficiency. Data Envelopment Analysis (DEA), a mathematical programming model that determines the efficiency of a decision-making unit by maximizing the sum of each organization’s input-to-output ratio, will be used to measure the efficiency score of each affiliate. The independent variable in this study is restricted funding, measured by restricted assets and contributions from government grants. In addition, we control for variables that may influence organizational efficiency and/or restricted funding. We will use a fractional logit model, as the conditional mean of the outcome is interpretable as a probability.

We expect that restricted funding will be negatively associated with nonprofit efficiency. That is, the more restricted funding a nonprofit has, the more likely it has a low level of organizational efficiency. This study adds to the heated discussion about the advantages and disadvantages of restricted funding in the literature (Hung, 2021; Hung & Berrett, 2021; Wiepking & De Wit, 2020; Wiepking & De Wit, 2023). Specifically, we contribute to the literature by answering the question of whether restricted funding hinders organizational efficiency. Based on the findings, this study will have important implications for nonprofits considering or already having restricted funding.

References

Coupet, J., & Berrett, J. L. (2019). Toward a valid approach to nonprofit efficiency measurement. Nonprofit Management and Leadership, 29(3), 299-320.

Hung, C. (2021). Restricted revenues and nonprofit service delivery: The roles of financial discretion. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 32(1), 136-150.

Hung, C., & Berrett, J. (2021). Service delivery under pressure: The effect of donor-imposed financial restrictions. Public Performance & Management Review, 44(3), 580-601.

Hung, C., & Berrett, J. (2023). The effects of commercialization on nonprofit efficiency and the moderating roles of government funding and organizational size. Nonprofit Management and Leadership, 33(4), 735-753.

Wiepking, P., & De Wit, A. (2020). Unrestricted impact: Field note on a mixed-method project studying the effects of unrestricted funding on grantees’ organisational and project impact.

Wiepking, P., & de Wit, A. (2023). Unrestricted funding and nonprofit capacities: Developing a conceptual model. Nonprofit Management and Leadership.

Authors

• ChiaKo Hung, Upenn

• Jessica Lauren Berrett, University of Colorado Colorado Springs