Arnold Kling  

Nonprofit Exit Rate

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Teresa D. Harrison and Christopher A. Laincz write


We find that [nonprofit] entry behavior resembles that of for-profits but greatly differs on the exit side. New public charities begin smaller than incumbents. The survivors grow much faster than incumbents while the variance in their growth rates declines with age. The hazard rate of exit for new nonprofits is extremely low, while the hazard rate of exit is negatively related to size and age.

I would think that the nonprofit sector would be more effective if the exit rate were high. That would signify that donors are paying attention and moving funds to nonprofits that work well.

In any case, my guess is that more research on nonprofits would be quite useful. It seems to me that economists have largely overlooked the sector.


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CATEGORIES: Business Economics



COMMENTS (4 to date)
anon writes:

Several years ago I did some work with a large national single-disease charity. They seemed to be more interested in growing the size of their endowment than funding research. Every year the donations they took in were greater than their spending on programs. If they were serious about the mission they would be investing so that their organization went the way of the American Smallpox Society (if there ever was such a thing), but of course the agency issues will prevent that.

John Thacker writes:

"If they were serious about the mission they would be investing so that their organization went the way of the American Smallpox Society (if there ever was such a thing), but of course the agency issues will prevent that."

Anon, you've actually touched on something here. Charities don't exit because they just change their focus. The March of Dimes was founded as the "National Foundation for Infantile Paralysis;" i.e., for polio. Once polio was basically conquered, the charity adopted its unofficial name, and went on to other diseases. It too, is accused of not making the best use of its money.

MADD is another commonly quoted example. Once drunk driving was taken seriously, MADD moved on to being more of a modern Temperance Union.

Dan writes:

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There is some that has been written about the "gift economy." Kenneth E. Boulding's "The Economy of Love and Fear" was one book that dealt with this, though I think you're right that much more needs to be done. The nonprofit I'm starting could certainly profit from such work.

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