Explaining Unrestricted Giving by Charitable Foundations : A Transaction Cost Approach

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 6,000 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