Nonprofit Resource Allocation Decisions: A Study of Marginal versus Average Spending

Abstract

Economic theory suggests managers make decisions to allocate resources based on marginal analysis, regardless of how such allocations influence performance measures. Even so, anecdotal evidence suggests that managers of charities deviate from marginal analysis and respond to external pressure from donors to achieve desired performance measures, computed as average ratios of spending on program activities to total spending. We examine whether spending patterns reflect concern and donor pressure by comparing marginal and average spending patterns. We provide evidence that, in most instances, average spending patterns do not change when budgets increase. That is, average program ratios do not change when budgets grow. We find that when budgets decrease, however, charity managers make resource allocation decisions that decrease the average program ratio. This asymmetry suggests that charity managers are more willing to report declining program ratios when budgets decrease, but not improve program ratios when budgets increase. We also find that charities that are small, rely little on contributions, receive no government support, and report zero fundraising make resource allocation decisions that decrease the program ratio when budgets increase. This finding suggests that some charities perceive greater pressure to conform to donor pressure than others.