Indirect costs for charities are the costs that are not directly related to their specific projects, including administration, personnel, facilities etc. They are necessary costs for the operation of charities, yet it is popular for donors to demand low indirect cost ratio for the money they donate. This summer I worked with Professor Benjamin Ho on a research project about the factors that influence charities’ indirect costs and indirect cost restrictions government imposes when it issues new grants to charities.

Working from a model set up by Baran, we tested three interesting propositions of the model using data provided by Charity Navigator. The first proposition states that if a charity receives more grants from the government, its indirect cost ratio will be lower. However, the regression results suggest the contrary (r = 0.773). The percentage of government grants and indirect cost ratio are positively correlated , as shown below. This is possible because if the government likes a charity, it is likely to grant more funds to the charity, and at the same time, allow more money to be spent on administration and facilities to help the organization grow. The correlation coefficient is influenced by levels of government grants and categories that charities belong to.

The second proposition states that when people care more about the charity, the indirect cost ratio is higher. We quantify how much people care about the charity using the number of page views of the charity on Charity Navigator. The regression result suggests that page view and indirect cost ratio are positively correlated (r = 0.0149), which is consistent with the model. To attract more attention from the public, the charity might spend more on building up public image, therefore it has higher indirect costs.

The last proposition states that when people care more about the charity, government is willing to set higher indirect cost restriction on the charity. In order to let the most-cared charities grow, government might allow the charities to spend more on their own development. Two findings from a GAO (Government Accountability Office) report are consistent with the proposition. The related statistics are summarized in the table below.

The GAO report first suggests that universities in the Northeast area have higher indirect costs restriction, while our data set shows that those universities get more attention from people than the others (p-value of 0.007). The second finding from the GAO report suggests that universities with higher research volume have higher indirect cost restrictions, and our data shows that people care more about universities with higher research volume.

In this project, my major role was to clean up data and perform analysis using STATA to test the propositions. I also spent time researching relevant data that were not included in the data set and could not be directly obtained from online databases. To carry the project forward, in the coming semesters, I am going to further test the results we found this summer, and form explanations for the patterns we see.