Should Donors Care About Overhead Costs? Do They Care?

This article reports on a theory-based experiment to determine whether there is an observable relationship between changes in charitable giving to an organization and changes in the proportion of revenue it spends on administration and fund-raising (“overhead ratio”). This article argues that overhead ratios are meaningless for comparing organizations, but changes in overhead ratios communicate useful, though incomplete, information to donors. Empirical studies have used organization-level data with mixed results. This research improves on past work by using donor-level information on federal employees in the Chicago area who donate through the Combined Federal Campaign with ready access to information on the overhead ratios of all participating charities. Donations are aggregated by charity and compared over time. Statistical tests give evidence of an inverse relationship between changes in overhead ratios and changes in giving that are robust with respect to model specification; however, collectively other factors are much more important.