02 Feb 2021Working Paper Summaries

Nonprofits in Good Times and Bad Times

by Christine L. Exley, Nils H. Lehr, and Stephen J. Terry

Tax returns from millions of US nonprofits reveal that charities do not expand during bad times, when need is the greatest. Although they are able to smooth the swings of their activities more than for-profit organizations, nonprofits exhibit substantial sensitivity to economic cycles.

Author Abstract

Need fluctuates over the business cycle, yet little is known about nonprofit behavior over the cycle. This paper exploits data from millions of tax returns and provides key descriptive facts about nonprofits in the face of economic fluctuations. Nonprofit revenue, balance sheets, and spending contract during bad times and grow in good times. Nevertheless, nonprofits partially smooth expenditure relative to income. Nonprofits sharply differ from for-profit firms, which exhibit stronger procyclicality and little smoothing. These facts add to the charitable giving literature, documenting outcomes for charities rather than contributors, and the business cycle literature, highlighting distinct nonprofit versus for-profit cyclicality.