Exploring the link between government funding and efficiency in nonprofit colleges

• Date: 01 September 2018
• Published date: 01 September 2018
• Author: Jason Coupet
• DOI: http://doi.org/10.1002/nml.21309

RESEARCH ARTICLE

Exploring the link between government funding and

efficiency in nonprofit colleges

Jason Coupet

Department of Public Administration, North

Carolina State University, Raleigh, North Carolina

Correspondence

Jason Coupet, North Carolina State University,

Public Administration, 209D Caldwell Hal,

Raleigh, NC 27605.

Email: jacoupet@ncsu.edu

Previous literature has suggested that federal funding can

hinder the efficiency of nonprofit organizations, but this

has yet not been empirically tested. This study used a

two-stage data envelopment analysis (DEA) model to

measure the efficiency of a set of private nonprofit

teaching-oriented colleges, then estimate the impact of

federal and state funding on organizational efficiency.

The findings indicate that, on average, increases in nei-

ther state nor federal funding effect efficiency of non-

profit colleges. Increasing state funding negatively

impacted the efficiency of public colleges (N= 799).

This study suggests that the challenges for nonprofits that

accompany government funding may not rise to a quanti-

fiable negative effect on efficiency.

KEYWORDS

data envelopment analysis, efficiency, external control,

government funding, resource dependence

1|INTRODUCTION

Previous literature, using resource dependence theory as a frame, has suggested that taking on fed-

eral funding can decrease organizational efficiency (Froelich, 1999; Gronbjerg, 1991; Pettijohn,

Boris, De Vita, & Fyffe, 2013). Resource dependence theory suggests that external funding streams

use the power that accompanies dependence on the government to change hierarchical and gover-

nance structures of the firms on which they are dependent (Malatesta & Smith, 2011; Perry &

Rainey, 1988; Wamsley & Zald, 1973). Government funding can increase organizational stability

and facilitate pursuit of important social goals; however, this external influence can increase costs.

Governments can comprise a notoriously heavy-handed external actor by exploiting the control that

accompanies their resource streams to pursue government goals. Governments often impose

Correction added on August 17, 2018, after first online publication: Jason Coupet's e-mail address was incorrect, and it was

changed to jacoupet@ncsu.edu.

Received: 22 March 2017 Revised: 7 February 2018 Accepted: 14 February 2018

DOI: 10.1002/nml.21309

Nonprofit Management and Leadership. 2018;29:65–81. wileyonlinelibrary.com/journal/nml © 2018 Wiley Periodicals, Inc. 65

accountability measures and influence on managerial structure, which can increase administrative

costs and limit organizational discretion. According to Froelich (1999), “Public entities explicitly

attempt to control program delivery to ensure that statutory and legislative requirements are met.

Mandated staff qualifications, facilities specifications, and client-mix criteria contribute to the cost

of program administration”(p. 256). This can lead to key organizational inputs' being used for man-

agement of the external relationship and the pursuit of external goals instead of the outputs central

to the organization (Gronbjerg, 1991). Pettijohn et al. (2013) found that, among other themes, com-

plex and time-consuming reporting requirements and limits to overhead expenses can strain the effi-

ciency of nonprofits, confirming the findings of Boris (2010) that many nonprofits were strained

with accountability mechanisms that accompany federal funding. This suggests that taking money

from governments might make nonprofits more bureaucratic, thus losing some of their uniqueness.

Although it is clear from previous literature that nonprofits can incur unwanted administrative

burdens by taking on federal funding (Froelich, 1999), the relationship between government funding

and nonprofit efficiency has never been tested empirically. This study uses a federal large dataset

that contains organizational and financial information for U.S. colleges and universities. In short,

this study asks: What is the effect of increases in public funding on the efficiency of nonprofit

higher education organizations? To address this question, I first measure the efficiency of the non-

profits in the sample, then test the impact of changes in federal funding.

2|RESOURCE DEPENDENCE

This study, in keeping with previous literature, uses resource dependence as a frame. The nonprofit

literature has argued that it is the threat of removal of key public resources that can affect nonprofit

efficiency (Froelich, 1999; Gronbjerg, 1991; Malatesta & Smith, 2011). Recent scholarship that

examines the relationship between governments and nonprofits has used stakeholder theory, agency

theory, and institutional theory to frame government relationships with nonprofit organizations

(Balser & McClusky, 2005; Knox & Gruar, 2007). Although Miragaia, Brito, and Ferreira (2016)

suggest that more efficient nonprofits might care more about external stakeholders than about inter-

nal ones, studies that are based on stakeholder theory have typically emphasized other key depen-

dent variables at the intersection of government and nonprofit relationships, such as public goal

alignment (Kim, Pandey, & Pandey, 2017), ethical dilemmas (Carvalho, Rodrigues, & Branco,

2017), and the balance of institutional logics (Mitchell, Weaver, Agle, Bailey, & Carlson, 2016).

Froelich (1999) and Pettijohn et al. (2013) suggest that nonprofits are encumbered by federal fund-

ing, not for isomorphic reasons, but because the threat of removal of a scarce financial resource

means that nonprofits must increase inputs to comply.

Resource dependence theory positions all organizations as part of an environment of other orga-

nizational and societal bodies that extend resources on which the organization depends for survival

(Pfeffer & Salancik, 2003). External actors have little incentive to cede complete control of the val-

ued resources that they extend, choosing instead to exploit the power imbalances that result from

external dependencies on organizational resources (Casciaro & Piskorski, 2005).

When the external actor is a government entity, it can use the power that accompanies resource

dependence to influence organizational operations and decision-making. Government funding can

have a positive impact on the pursuit of many organizational goals, including diversity, equity, and

fairness (Mosley, 2012; Zhan & Tang, 2016). Public funding streams, however, also can include

staffing, reporting, and fixed-cost requirements, adding up to what can be an active role in the gov-

ernance of the input size and use of dependent organizations (Froelich, 1999). Governments are

66 COUPET