Ex-post Funding: Innovating Non-profit Organisations

Non-profit Organisations (NPO), differ from forprofit businesses in two important ways. First, the NPO status does not permit distribution of surplus cash flows as dividends or pay-outs to the shareholders (or units) that establish control and finance the NPO. Second, most NPOs raise funds for operations through donations from various entities and use these funds to achieve social goals, where the social goals typically involve the provision of a public good that simultaneously benefits many individuals. In spite of these differences, the non-profit sector contributes significantly to the global economic activity. A recent study based on financial data available from 40 countries, estimates the operating expenditure of the non-profi t sector to be approximately $2.2 trillion and the sector employs almost six percent of the economically active populations in these countries [Salamon, 2010]. Typically, donors who contribute to the NPO’s cause include government agencies, philanthropic institutions, and individual donors. It is noteworthy that voluntary contributions, via individual donors, constitute about 14 percent of the total funds raised by the NPOs and represent a significant amount in absolute terms [Vesterlund, 2006]. A common reason cited for such voluntary contributions is that individual donors derive personal “utility” from the mere act of contributing for a good cause. While it may be true that donors make voluntary contributions because of this “warm glow” effect [Andreoni, 1990], it is also well understood that many donors also care about the “impact” of their donation [Duncan, 2004]. That is, despite the lack of a profi t motive, and not being consumers of the public good provided, donors care about the total benefit provided by the NPO to the end beneficiary population. In other words, such impact donors worry about the NPO’s ability to use their contributions to provide maximum possible benefit (the amount of public good created) that is, they care about the NPO’s operational efficiency.