The influence of administrative cost ratios on state government grant allocations to nonprofits

Government has come to rely on nonprofit organizations to deliver publicly funded human and cultural services, and it has become a significant donor to the nonprofit sector. When government agencies make grants to nonprofit organizations, administrative cost ratios are often requested, but it is not clear whether or how these ratios influence allocation decisions. Theoretical perspectives alternatively frame the administrative cost ratio as an indicator of price, with negative eff ects on allocations, or as an indicator of quality, with positive eff ects on allocations. The authors test these hypotheses using original state-level grants data from the state of Georgia. The results off er inconclusive evidence about whether the price or quality hypothesis explains government's use of administrative cost ratios in decisions regarding the amount of grant allocations. What drives government grant-making decisions remains an open and more complex question that involves a range of other variables that are independent of price and quality. The authors address this question in terms of policy and management implications and a future research agenda.