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Drawing upon transaction costs economics, we examine the determinants of the two-stage allocation process within the local United Way (UW) system. We use a unique multiyear data set that captures local UW allocations to nonprofit grantees at four points in time (2000, 2004, 2008, and 2010). We find that the first stage is screening, in which organizations' legitimacy, mission, and financial performance are preliminary determinants of partnership in the UW system. In the second stage, UWs incentivize existing grantees with high legitimacy to stay in the system through larger allocation share. These determinants are stable over time. However, size of these effects varies across size of UW system; this finding suggests that transaction costs influence the likelihood of using performance measures to evaluate grantees in the first stage of the allocation process.

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