Since nonprofit organizations play an important role in providing goods and services in all countries, this paper aims at determining optimal policies for a charity. The starting point of our analysis is that the amount of donations received by a charity are function of its reputation, which is an asset that can be built up over time, not overnight. To account for this important aspect, we propose a dynamic model where the charity can allocate its revenues to three main activities, namely, program expenses (charitable projects), information (promotion of its causes, website, etc.) and administration (worker/manager salaries and other administrative costs). We assume that the donors are sensitive to the way in which the charity is managed. If the administrative expenses are above a socially accepted norm, then the charity's reputation suffers. The opposite occurs when the charity is efficient and keeps its administrative costs below the norm. We prove that depending on the parameter values, there exist different optimal policies involving either positive or nil advertising and administrative expenses. We discuss some policy implications for each case and assess the impact of the norm on the results.
Published June 2019 , 24 pages