Government funding of charities’ core costs might be needed to prevent charities losing donations, a new academic paper warns.
The study, which was published in The Economic Journal and is called "Are donors afraid of core costs?", argues that charities’ fixed costs are off-putting to donors and government intervention is needed.
Fixed costs are essentially operating costs that do not increase as the charity’s size increases – for example, the cost of renting a car will remain the same for all organisations.
The paper argues that, although fixed costs are seen as a way to achieve efficiency in the private sector, it can have a negative effect on charities because donors do not want to see their donations spent on operating the charity.
This bias among donors means those charities that are less cost-effective but have lower fixed costs can be prioritised by the public, the paper says.
The paper concludes that the bias against charities with higher fixed costs should lead to government taking a more proactive role in funding core costs when providing grant funding.
This could be directed either to established charities and new technology, or towards start-ups, the paper says.
"Government funding choices do appear to be sensitive to charities’ core funding needs, but it is not clear whether this is motivated by the need to promote entry by new charities—overcoming the implicit entry barriers that fixed costs can create—or instead by the need to support efficient technology adoption by incumbents," the paper says.