The economic impact of non-profits with respect to the State of the Economy, Nash Equilibrium and

Knightian Uncertainty

Almezy|Radhamony|Stark

AGENDA

I. IntroductionII. The Economics of Charitable GivingIII.The Game Theoretic Impact on Non-ProfitsIV.Risk and Uncertainty in the Non-Profit SectorV. Discussion (Conclusion)

NON-PROFIT IPO MODEL WITH INTERVENTIONS

THE ECONOMICS OF CHARITABLE GIVING: INTRO

Sea of Goodwill:

“There are 40,000 nonprofit organizations dedicated to serving the military and veterans and an estimated 400,000 service

organizations that in some way touch veterans or service members.” –www.charitywatch.org

“Sea of Goodwill” “After the Sea of Goodwill” “Chartering the Sea of Goodwill”

THE ECONOMICS OF CHARITABLE GIVING: INPUTS

“In 2014, the largest source of charitable giving came from

individuals at $258.51 billion, or 72% of total giving; followed by

foundations ($53.97 billion/15%), bequests ($28.13 billion/8%), and

corporations ($17.77 billion/5%).” – www.nptrust.org

Sources of Donations

IndividualsFoundationsBequestsCorporations

What about alternative capital and the government?

THE ECONOMICS OF CHARITABLE GIVING: INDIVIDUALS

Communal Relationship Exchange Relationship Motivations

Altruistic Donation

“Warm Glowing” of giving

Sense of Nationalism / Patriotism

Motivations

“Quid pro quo”

Direct Benefit from Organization

Financial Benefit

Positive Image

THE ECONOMICS OF CHARITABLE GIVING: BEQUESTS / PLANNED GIVING“The property or money that you promise in your will to give to another person

or organization after you die” – Merriam Webster

Michael Guty bequeathed $6 million to libraries and veterans organizations in three Connecticut communities.

Many bequests are in the form of endowments. Term Endowment- specific period of time /event Unrestricted- flexible Quasi-endowment- specific propose Restricted Endowment- principal is held , earnings from investments used

THE ECONOMICS OF CHARITABLE GIVING: CORPORATIONS

THE ECONOMICS OF CHARITABLE GIVING: CORPORATIONS / TRENDS Corporations want to measure Return on Investment (ROI)

Donors want “Collective Impact “

Go through corporation versus foundation if perceived benefit

Operation Support Grants Challenging to Quantify Impact

Grants for Specific Initiative or Project Easier to Quantify Impact

THE ECONOMICS OF CHARITABLE GIVING: FOUNDATIONS

Three Types

Individual e.g. Bill and Melinda Gates Foundation

Community Foundations- Hartford Foundation for Public Giving

Corporate Foundations- Travelers Foundation

THE ECONOMICS OF CHARITABLE GIVING: GOVERNMENTThe government funds non-profits through grants.

Grants are challenging to get. It is not free money!

Grants given based on needs of government .

“For example, in 2015 the US government through the Department of Veterans Affairs gave grants to 1,641 organizations that impacted veterans in one way or another. Many

of the 1,641 organizations that received awards were non-profit based.”

THE ECONOMICS OF CHARITABLE GIVING: AGGREGATORS

THE ECONOMICS OF CHARITABLE GIVING: ALTERNATIVE CAPITAL

Social Impact Bonds (SIBs)/ Pay for Success (PFS)

Investment Income

Seed Money

Source: Forbes.com

THE GAME THEORETIC IMPACT ON NON-PROFITS

Create an environment in which veteran non-profit organizations effectively work together for the greater

good of all needing support Non-profit rivalry Seed money United funds Financial disclosure Social entrepreneurship

NON-PROFIT RIVALRY 3 characteristics that determine stability between non-profits:

1. Alliance formation rule: fundraising between one non-profit can affect donations received by another non-profita. Unanimity ruleb. Aggregative rule

2. Extent to which fundraising efforts are either complementary or substitutes

3. If an individual or group of non-profits abandon the agreement

Source: Aldashev, Marini, and Verdier 2012

SEED MONEYseed capital: initial funds leveraged to start a business

Within this presentation “seed capital” is referred to as initial funds for a particular fundraising campaign

Total contributions increase with the amount of seed money

Sources: Investopedia; List, Lucking-Reiley 2002

UNITED FUNDS VS. DONATING TO SINGLE CHARITYUnited fund: several charities under

one umbrella in which funds are then dispersed to each charity as donors give (indirect model)

Single charity: direct donations given to specific charity

Source: Apinumnahakul and Barham 2012

FINANCIAL DISCLOSURE

Positives of transparency

Market differentiation Attract more donations Boost accountability Public trust

Do you want to know how the money you donate is spent?

Why donors prefer disclosure

1. Publicity 2. Reveals the effectiveness of

the organization 3. Can understand how their

funds can have maximum impact

Source: Zhuang, Saxton, and Wu 2011

SOCIAL ENTREPRENEURSHIP Social entrepreneur: an individual with

creative “solutions to society’s most pressing social problems”

Potential to decrease rivalry amongst non-profits

Social ecosystem must be created … map of of ecosystem identifying all players and environmental conditions and the relationships between them

Source: Ashoka 2016

RISK AND UNCERTAINTY

Risk response of donors Networked nonprofits Philanthropic equity

RISK RESPONSE OF DONORS

h probability of securing donatio

Risk Response of donors based on perception of possible ‘Lemons’

NETWORKED NONPROFIT

Source: Jane Wei-Skillern, Sonia Marciano “The Networked Nonprofit” Spring 2008.

Traditional non-profit

Focus on organization growth Follow hub and spoke model for

any kind of partnership with other organizations

Compete with nonparticipating organizaqitons and thrive to contorl the participating organizations

Networked non-profit

Focus on achieving its mission by building network

Follow network model containing nodes, to collectively strive for achieving the mission

Form long term partnership with trusted peers to tackle the mission on multiple fronts

PHILANTHROPIC EQUITY

Capacity building investments by donors committed towards the growth of the nonprofit organization

Add to the seed money Encourages the formation of innovative

nonprofit organizations

Philanthropic equity is the enterprise level investments intended to subsidize organizations until they reach a point when their activities are fully sustained by donors.

Source: “A new way to invest in nonprofits” http://www.forbes.com/2010/11/04/nonprofit-finance-fund-intelligent-investing-equity.html

DISCUSSION Complexity of non-profit funding environment Competitive obstacles

Seed money United funds Financial disclosure Social entrepreneurship

Risk and uncertainty Lemon model Networked non-profit Philanthropic equity

QUESTIONS?!?