Service Delivery Under Pressure: The Effect of Donor-Imposed Financial Restrictions

The effects of commercialization on nonprofit efficiency and the moderating roles of government funding and organizational size

“…Kim and Charles (2016) find that the data “is a reliable source of information for researchers who want to study the behavior of nonprofit organizations” (p. 357). The data have been widely used to study nonprofit finance (e.g., Charles, 2018; Charles & Kim, 2016; Grizzle, 2015; Hung & Berrett, 2021; Kim, 2017; Kim et al, 2018; Levine Daniel & Kim, 2018). The main advantage of using the CDP data is that, unlike National Center for Charitable Statistics data sets, it consists of detailed and large‐scale revenue, human resource, and program service information that enables this study to examine the relationship between commercialization and efficiency.…”

“…For instance, to fulfill their missions, many nonprofits rely on government support or foundation grants, or both. The problem is that most of these external resources come with strings attached that sometimes put nonprofits in a power‐disadvantaged position (Hung & Berrett, 2021; Shon et al, 2019). Nonprofits need more unrestricted revenue sources to manage the power dependence.…”

“…For example, government‐funded nonprofits are required by governments to follow specific policies and regulations (Shon et al, 2019). Restricted funding, however, reduces nonprofit managers' flexibility in allocating resources (Li et al, 2012; Shon et al, 2019; Surysekar et al, 2015), which in turn hinders nonprofits' ability to deliver services effectively and efficiently (Center for Philanthropic Studies, 2021; Hung & Berrett, 2021). In short, while commercialization brings efficiency to nonprofits, nonprofits with higher levels of government funding might be less efficient than those with lower levels of government funding, due primarily to the above‐mentioned government funding problems.…”

Unrestricted funding and nonprofit capacities: Developing a conceptual model

“…By imposing restrictions, donors try to avoid inefficiency and ascertain their grants align with their own organization's objectives. Donor‐imposed restrictions typically occur when nonprofit governance is weak and “when information asymmetry between donors and nonprofit managers is high,” and donors consequently have difficulty knowing if the nonprofit is actually providing the services the funder intends to support (Hung & Berrett, 2021, p. 582; Thornton, 2010; Yermack, 2017). Yet, these restrictions on funding may come with drawbacks, especially related to the capacity of nonprofits to work toward their mission.…”

“…Donor‐imposed restrictions can lead to mission drift (Henderson & Lambert, 2018; Surysekar et al, 2015), may increase paperwork (Gronbjerg, 1991; Kender‐Jeziorska, 2019; Zihnioğlu, 2019), and may hamper organizations' abilities to respond to changing needs (Elbers & Arts, 2011). Recent empirical studies among cultural institutions in the U.S. show that donor‐imposed restrictions are associated with less nonprofit output (Hung, 2021; Hung & Berrett, 2021). Restrictive funding can also cause pressure to cut on core operational costs, which may threaten organizational stability and survival, leading nonprofits to enter the so‐called “starvation cycle” (Altamimi & Liu, 2022; Gregory & Howard, 2009; Lecy & Searing, 2015; Schubert & Boenigk, 2019; Wing et al, 2004).…”