Restricted Revenues and Nonprofit Service Delivery: The Roles of Financial Discretion

The proposition that restricted revenues inhibit nonprofit service delivery by reducing their financial discretion has accumulated in the academic literature but has not been empirically tested. Using a sample of arts and culture nonprofits in the USA, this study examines whether the proposition is upheld through a resource dependence lens. The results suggest that restricted revenues limit nonprofits’ efforts to seek other sources of revenue, which leads to a decrease in nonprofit service delivery. The results also suggest that this indirect effect holds and is even more pronounced in donative and performing arts nonprofits. Restricted revenues, however, do not curb nonprofits’ administrative expenses, and an increase in administrative expenses does not lead to an increase in nonprofit service delivery. The prevailing notion that restricted revenues force nonprofits to shift their cost structures away from administrative expenses may need to be reconsidered. Overall, this study partially supports the proposition that financial discretion plays a role in explaining the negative relationship between restricted revenues and nonprofit service delivery.