March 2021

The secret curse of the nonprofit world is restricted donations.

If you haven't been involved with nonprofits, you may never have heard this phrase before.

But if you have been, it probably made you wince.

The secret curse of the nonprofit world is restricted donations. If you've worked with nonprofits, the phrase probably made you wince.

The secret curse of the nonprofit world is restricted donations — a phrase that, if you've worked with nonprofits, probably made you wince.

Restricted donations mean donations where the donor limits what can be done with the money.

This is common with big donations, perhaps the default.

And yet it's usually a bad idea.

Usually the way the donor wants the money spent is not the way the nonprofit would have chosen.

Otherwise there would have been no need to restrict the donation.

But who has a better understanding of where money needs to be spent, the nonprofit or the donor?

If a nonprofit doesn't understand better than its donors where money needs to be spent, then it's incompetent and you shouldn't be donating to it at all.

Which means a restricted donation is inherently suboptimal.

It's either a donation to a bad nonprofit, or a donation for the wrong things.

A restricted donation limits what's done with the money — usually a bad idea, since if the donor's use matched the nonprofit's there'd be no need to restrict it. So who knows better, donor or nonprofit?

If a nonprofit doesn't understand better than its donors where money needs to go, it's incompetent and you shouldn't be donating to it at all.

So a restricted donation is inherently suboptimal: either to a bad nonprofit, or for the wrong things.

A restricted donation limits how the money is spent — usually toward something other than what the nonprofit would have chosen. But who understands better where money needs to go, the donor or the nonprofit?

There are a couple exceptions to this principle.

One is when the nonprofit is an umbrella organization.

It's reasonable to make a restricted donation to a university, for example, because a university is only nominally a single nonprofit.

Another exception is when the donor actually does know as much as the nonprofit about where money needs to be spent.

The Gates Foundation, for example, has specific goals and often makes restricted donations to individual nonprofits to accomplish them.

But unless you're a domain expert yourself or donating to an umbrella organization, your donation would do more good if it were unrestricted.

Two exceptions. One is the umbrella organization: restricting a gift to a university is fine, since it's only nominally a single nonprofit.

The other is a donor who really does know as much, like the Gates Foundation. Otherwise unrestricted does more good.

Two exceptions: umbrella organizations like universities, which are only nominally a single nonprofit, and donors who genuinely know as much as the nonprofit, like the Gates Foundation. Otherwise, unrestricted does more good.

If restricted donations do less good than unrestricted ones, why do donors so often make them?

Partly because doing good isn't donors' only motive.

They often have other motives as well — to make a mark, or to generate good publicity [1], or to comply with regulations or corporate policies.

Many donors may simply never have considered the distinction between restricted and unrestricted donations.

They may believe that donating money for some specific purpose is just how donation works.

And to be fair, nonprofits don't try very hard to discourage such illusions.

They can't afford to.

People running nonprofits are almost always anxious about money.

They can't afford to talk back to big donors.

So why restrict? Because doing good isn't the only motive: donors also want to make a mark, win publicity, or comply with regulations.

Many never considered the distinction, and nonprofits don't try hard to discourage it.

They can't afford to. People running nonprofits are anxious about money, and can't talk back to big donors.

If restricted donations do less good, why make them? Doing good isn't the only motive — there's making a mark, publicity, compliance — and many donors never considered the distinction. Nonprofits, anxious about money, can't afford to correct them.

You can't expect candor in a relationship so asymmetric.

So I'll tell you what nonprofits wish they could tell you.

If you want to donate to a nonprofit, donate unrestricted.

If you trust them to spend your money, trust them to decide how.

You can't expect candor in so asymmetric a relationship. If you trust them to spend your money, trust them to decide how.

You can't expect candor in so asymmetric a relationship, so here's what nonprofits wish they could say: if you trust them to spend your money, trust them to decide how.

Note

[1] Unfortunately restricted donations tend to generate more publicity than unrestricted ones. "X donates money to build a school in Africa" is not only more interesting than "X donates money to Y nonprofit to spend as Y chooses," but also focuses more attention on X.

Thanks to Chase Adam, Ingrid Bassett, Trevor Blackwell, and Edith Elliot for reading drafts of this.

Restricted donations get more publicity: "X builds a school in Africa" is more interesting, and more about X, than "X donates to Y."

Restricted donations generate more publicity — "X builds a school in Africa" is both more interesting and more focused on X than "X donates to Y to spend as it chooses."