The Nonprofit Starvation Cycle: The Extent of Overhead Ratios’ Manipulation, Distrust, and Ramifications

Abstract

While little evidence supports the notion that financially responsible nonprofits must maintain low overhead ratios, the persistent preference for reduced overhead costs endures. Our study explores (a) the extent of underreporting behaviors, (b) the level of trust (or distrust) that nonprofit leaders have in overhead ratio reports, and (c) the motivations perceived by managers that drive nonprofits to adjust their overhead ratios and the resulting consequences. Experiment results from the “item sum double-list technique” (ISDLT) reveal that nonprofit managers may artificially lower their overhead ratios by approximately 10 percentage points, a range spanning from 7 to 16 percentage points. This adjustment aims to enhance their competitiveness in the funding market. Our vignette-based experiment uncovers significant trust issues related to reported low overhead ratios, potentially indicating accounting manipulation within the field. Complemented by open-ended survey responses from nonprofit managers, our research offers valuable insights into this domain.