The size effect in the administration costs of charities

Abstract

There has been considerable interest of late in the issue of the efficiency of voluntary organizations with authors such as Wise (1997) and Hyndman and McKillop (1999) noting appreciable economies of scale across the size categories investigated. In this article we develop this analysis, fitting different functional forms to the relationship between size and the ratio of administration costs to total expenditures (ACE). We show that an inverse function provides a simple, plausible and adequate representation of this relationship. We apply the estimated inverse function to derive a size-adjusted benchmark for the comparison of ACE ratios between charities. This adjusted benchmark can replace the traditional practice of comparing administration cost ratios to the sector average when assessing managerial efficiency.