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.  
  
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.  
  
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.  
  
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.  
  
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.  
  
  
  
  
  
**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.  
  

