Donor Reliance on Accounting and its Consequences for the Charitable Distribution Channel

The organization of charitable distribution channels to ensure donor contributions reach beneficiaries in an efficient manner and the use of accounting metrics of such efficiency (whether provided directly or by charity rating groups) are oft-discussed issues in the nonprofit sector. The two issues are inextricably linked since reported efficiency measures influence subsequent donor giving. This paper develops a parsimonious model of a charity that must decide how best to employ its resources, either by acting as a direct service provider or as a grant provider to organizations that provide services to beneficiaries. We show that the desire to boost perceptions of efficiency vis-a-vis accounting reports leads an organization to rely more on others to provide services rather than being a direct service provider. This temptation to expand either the scope or length of the charity supply line is muted by a desire to avoid redundant costs and improve service delivery. The model's results have implications both for the role of nonprofit accounting and observed distribution strategies of nonprofits