| Abstract: |
I study “donor governance,” which occurs when contributors to non-profit
firms place restrictions on their gifts to limit the discretion of managers.
In a study of U.S. art museums, I find that this practice has grown
significantly in recent years, and it represents the largest source of
permanent capital in the industry. When donor restrictions are strong, museums
shift their cost structures away from administration and toward program
services, and they exhibit very high savings rates, retaining in their
endowments 45 cents of each incremental dollar donated. Retention rates are
near zero for cash generated from other activities. Restricted donations
appear to stabilize non-profits and significantly influence their activities,
but they reduce management flexibility and may contribute to lower profit
margins. Rising donor governance in U.S. art museums may represent a reaction
by contributors to the industry’s high rates of financial distress, weak
boards of trustees, and large private benefits of control enjoyed by managers. |