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Explaining unrestricted giving by charitable foundations: A transaction cost approach

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  • Thornton, Jeremy

Abstract

This paper extends a transaction costs framework to the nonprofit sector where information asymmetries are typically acute. I explore the decision of charitable foundations to place material restrictions on grants to nonprofits. Foundations often place constraints on grant use to limit cross-subsidy of projects or ex-post opportunism by nonprofit managers. In contrast, nonprofits prefer fewer restrictions to smooth income across revenue streams or compensate for shifts in demand. The paper utilizes a pseudo panel of 6000 grant contracts to examine the relationship between the various costs of those restrictions and the observed characteristics of grant contracts. Empirical results confirm received theory that high contracting costs will reduce the probability of grant restrictions.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 1 (January)
Pages: 44-53

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Handle: RePEc:eee:indorg:v:28:y:2010:i:1:p:44-53

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Nonprofit Grant Incomplete contracts Transaction costs;

References

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  1. Oliver E. Williamson, 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 171-195, Summer.
  2. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  3. Fisman, Raymond & Glenn Hubbard, R., 2005. "Precautionary savings and the governance of nonprofit organizations," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2231-2243, December.
  4. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  5. Ackerberg, D.A. & Botticini, M., 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Papers 96, Boston University - Department of Economics.
  6. Edward L. Glaeser & Andrei Shleifer, 1998. "Not-For-Profit Entrepreneurs," NBER Working Papers 6810, National Bureau of Economic Research, Inc.
  7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  8. George P. Baker & Thomas N. Hubbard, 2003. "Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information," American Economic Review, American Economic Association, vol. 93(3), pages 551-572, June.
  9. Bilodeau, Marc, 1992. "Voluntary contributions to united charities," Journal of Public Economics, Elsevier, vol. 48(1), pages 119-133, June.
  10. Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
  11. Jeremy Thornton, 2008. "Competition, Contractibility, and the Market for Donors to Nonprofits," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(1), pages 215-246, May.
  12. Aggarwal, Rimjhim M., 2007. "Role of risk sharing and transaction costs in contract choice: Theory and evidence from groundwater contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 475-496, July.
  13. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-61, October.
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