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A Theoretical Model of the Effects of Public Funding on Saving Decisions by Charitable Nonprofit Service Providers

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  • Femida Handy
  • Natalie J. Webb

Abstract

Why do charitable nonprofit, service‐providing organizations save? What are the tradeoffs between using income to build up cash reserves and serving more clients? Saving may generate income, protect the organization against a drop in donations, and increase the organization's chances of survival. Saving, though, may affect the likelihood that nonprofits receive private and public funding. We model the relationship among private and public income, economic conditions, and nonprofit savings. We find that anticipation of government help during difficult times tends to reduce the amount of saving done by the nonprofit. This effect is strengthened if government officials view unspent donations as indicative of a lack of need. Both these effects provide a strong incentive for nonprofits to spend on current consumption rather than to save for the future, and thus to increase the burden on the public purse.

Suggested Citation

  • Femida Handy & Natalie J. Webb, 2003. "A Theoretical Model of the Effects of Public Funding on Saving Decisions by Charitable Nonprofit Service Providers," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 74(2), pages 261-282, June.
    • Handle: RePEc:bla:annpce:v:74:y:2003:i:2:p:261-282
    DOI: 10.1111/1467-8292.00224
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    Cited by:

    1. Laudo Ogura & David T Yi, 2015. "Determinants of saving in U.S. nonprofit organizations," Economics Bulletin, AccessEcon, vol. 35(4), pages 2786-2795.

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