Interdependence
of Commercial and Donative Revenues
Lewis M. Segal and Burton
A. Weisbrod
Abstract
The financial health of nonprofit organizations depends on their
ability to generate donations and to sell services profitably. Are
these two sources of revenue - one philanthropic, the other commercial
- interrelated? More particularly, does a change in donative revenue
(e.g., a cut in government grants), influence nonprofits' commercial
activity, or vice versa?
We examine the hypotheses that nonprofits' commercial sales activities
are mechanisms for financing their principal, tax-exempt, mission
and that nonprofits prefer to avoid such activities, engaging in
them reluctantly and then only for their profitability. A testable
implication of this is that those activities are undertaken to a
degree that varies inversely with the nonprofit's revenue from the
preferred source, donations. If there is aversion to commercial
activity, despite its potential financial contribution to the organization's
mission, then donations would "crowd out" commercial activities,
with decreased donations causing expansion of commercial activity
and increased donations diminishing it.
Using data for 2,679 nonprofits observed from 1985 to 1993, we
estimate a set of structural and reduced form models that suggest
exogenous declines in donations result in significant increases
in commercial activity for some industry sectors, but not for others.
This variation is understandable in light of differential organization
goals as well as differential interdependencies among revenue sources
and among costs of providing mission-related and ancillary goods
production.
Lewis M. Segal, Federal Reserve
Bank of Chicago Burton A. Weisbrod, Department of Economics,
Northwestern University
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