The crowding‐out effect within government funding: Implications for within‐source diversification

• Published date: 01 June 2019
• Date: 01 June 2019
• DOI: http://doi.org/10.1002/nml.21351
• Author: Jianzhi Zhao,Jiahuan Lu

RESEARCH NOTE

The crowding-out effect within government funding:

Implications for within-source diversification

Jianzhi Zhao

1

| Jiahuan Lu

2

1

School of International Relations and Public

Affairs, Fudan University, Shanghai, China

2

School of Public Affairs and Administration,

Rutgers University-Newark, Newark, New Jersey

Correspondence

Jiahuan Lu, School of Public Affairs and

Administration, Rutgers University-Newark—

SPAA, 111 Washington Street, Newark, NJ

07102.

Email: jiahuan.lu@rutgers.edu

The benefits and risks of revenue diversification lead

scholars to propose within-source diversification as a pos-

sible compromise. Although this revenue strategy sounds

promising, no scholarly attention has been devoted to

empirically examining it. This study explores within-

source diversification across government funding, specifi-

cally whether nonprofit receipt of support from a major

government funder affects support from other government

funders. Using a panel dataset of U.S.-based international

development nonprofits from 1995 to 2014, we find that

nonprofits with more funding from the major funder are

associated with significantly less funding from other fun-

ders. This crowding-out effect weakens as organization

size grows. The findings imply that the within-source

diversification strategy might be more desirable for larger

organizations with the capacity to manage multiple fund-

ing relationships.

KEYWORDS

government funding, revenue concentration, revenue

diversification, within-source diversification

1|INTRODUCTION

Nonprofit organizations typically rely on multiple sources for financial support, such as govern-

ment funding, individual contributions, foundation grants, and earned income. Given that each

revenue source has its own benefits and risks, nonprofits are always encouraged to diversify

across multiple funding sources to achieve organizational viability (Chang & Tuckman, 2010;

Froelich, 1999). Indeed, a large body of literature demonstrates that revenue diversification can

promote organizational health through reducing financial vulnerability and volatility

(e.g., Carroll & Stater, 2009; Greenlee & Trussel, 2000; Hager, 2001; Tuckman & Chang, 1991).

However, recent empirical evidence suggests that revenue diversification can be detrimental to

Received: 9 June 2018 Revised: 12 December 2018 Accepted: 18 December 2018

DOI: 10.1002/nml.21351

Nonprofit Management and Leadership. 2019;29:611–622. wileyonlinelibrary.com/journal/nml © 2019 Wiley Periodicals, Inc. 611