Essays on Nonprofit Competition

Thesis (Ph.D.)--University of Washington, 2015The predominant objective of this dissertation is the analysis of competition among nonprofits in a market. The focus is on exploring nonprofit behavior in markets in which they demand revenue from various sources. Chapters 1 and 2 of this dissertation examine the effects of nonprofit competition on the receipt of charitable donations and the extent of revenue diversification of an organization, while Chapter 3 evaluates the performance of a fundraising mechanism in the presence of one or more nonprofits in a market. The nonprofit sector has been expanding rapidly over the past decade, particularly in the United States (US). The reasons for such a growth - the shrinking government sector along with the increasing demand for the goods and services provided by nonprofit organizations - is easy to understand. What is unclear are the consequences of the unrestrained proliferation of nonprofit organizations, especially in the absence of a corresponding increase in the resources to sustain such an expansion. Herein, lies the motivation underlying this dissertation. In addition, each chapter also seeks to provide guidance to nonprofit managers and policy makers about feasible strategies in an increasingly competitive environment. In the first chapter, I empirically estimate the effect of nonprofit competition on the charitable donations received by them. The total impact of competition is decomposed into two effects to capture the two different channels through which nonprofit competition can affect charitable donations. First, is the fundraising effect that examines the change in donations caused by adjustments in the fundraising efforts of nonprofits in response to varying degrees of competition. Second, the non-fundraising effect examines the changes in donations caused by competition driven adjustments in other organizational strategies, including management expenses, changes in the mission statement and shifts in volunteer reliance. The estimation is conducted at the nonprofit and aggregate levels, using a simple instrumental variable regression approach on US public charity data obtained from their annual tax returns from 1998-2003. The key finding of this chapter is that an increase in nonprofit competition leads to a decrease in the average amount of charitable donations received. At the same, the aggregate donations by all donors in a market increases marginally due to greater nonprofit competition, indicating the probability of wasteful shifting of donor contributions between organizations. The second chapter, then, goes on to take a broader view of nonprofit finances by investigating the effect of nonprofit competition on the extent of revenue diversification of the organizations. Though there exists an extensive discussion on the importance of revenue diversification for nonprofits, the question of how the revenue diversification strategy evolves with market competition has not been considered. This chapter seeks to contribute to the literature through an empirical examination of how the nonprofit competition influences the level of revenue diversification. The theoretical prediction derived from the transaction cost theory is that nonprofit competition will have a negative effect on revenue diversification. However, based on the econometric methods applied to a sample of US public charities, similar to the one used in the previous chapter, I do not find convincing evidence that nonprofits change their income portfolio in response to increasing competition in a market. Growing nonprofit competition reduces the receipt of charitable donations by a typical nonprofit organization. In such a situation, there is also no indication that nonprofits increasingly seek to sustain themselves by looking towards multiple sources of revenue. Given the dominance of private contributions in the income portfolio of nonprofits, it will be useful to focus on mechanisms adopted by nonprofits to raise charitable donations. Because nonprofit level data, that is aggregated over donors, cannot be utilized to study individual behavior, I adopt a different method in the final chapter of this dissertation. In the third chapter, which is a joint work with Sergey Rabotyagov, we experimentally examine the effect of using lotteries in conjunction with provision points to finance public goods. While the existence of a threshold reduces free-riding, it does not completely eliminate the incentive of individuals to donate zero for the public good. This prompts the question of whether there is a fundraising mechanism that works better in raising funds. Our proposed use of a lottery along with the threshold requirement is compared to the provision point mechanism in a laboratory experimental setup. We also test a modification of our lottery design that is ideal for situations with multiple threshold public goods. This new mechanism eases the coordination among the potential donors and prevents the diversions of contributions for the lottery prize. We find that the lottery with provision point outperforms the provision point mechanism by increasing the frequency with which the public good is provided as well as the amount of average individual contribution. The findings have implications for crowdfunding websites that have becoming an increasingly popular tool used by nonprofits for the provision of public goods