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Journal of Law, Economics, and Organization Advance Access originally published online on September 3, 2007
Journal of Law, Economics, and Organization 2008 24(1):215-246; doi:10.1093/jleo/ewm036
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© The Author 2007. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Competition, Contractibility, and the Market for Donors to Nonprofits

Marco A. Castaneda*

Tulane University

John Garen**

University of Kentucky

Jeremy Thornton***

Samford University

* Department of Economics, College of Business & Economics, Tulane University. Email: marco{at}uky.edu.

** Department of Economics, College of Business & Economics, University of Kentucky. Email: jgaren{at}uky.edu.

*** School of Business, Samford University. Email: jpthornt{at}samford.edu.

This article investigates theoretically and empirically the effects of competition for donors on the behavior of nonprofit organizations. Theoretically, we consider a situation in which nonprofit organizations use donations to produce some commodity, but the use of donations is only partially contractible. The main results of the model indicate that an increase in competition (i) decreases the fraction of donations allocated to perquisite consumption and (ii) increases the fraction of donations allocated to promotional expenditures. Moreover, the effects of competition are magnified by the ability to contract on the use of donations. These hypotheses are tested with data on the expenditures of nonprofit organizations in a number of subsectors where competition is primarily local. We use across–metropolitan statistical areas' variation to measure differences in competition and proxy contractibility by the importance of tangible assets, which are more easily observed by donors. The estimated effects of competition and contractibility are consistent with our model.


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