This paper provides a conceptual model that explains how competitive and institutional dynamics at the community level influence the ability of welfare-oriented nonprofits to eradicate income inequality. To test our framework, we build a large and unique 7-year panel dataset consisting of data from 245 U.S. communities. We find that an increasing number of welfare nonprofits is beneficial for reducing community inequality but this is so up to a point, after which resource competition decreases their effectiveness. This competition for resources is also present when a high density of elite-oriented nonprofits operates in the same community. Hypotheses focused on the institutional dimension receive mixed support. As predicted, welfare nonprofits are more effective when they operate in communities with strong law enforcement capabilities and less effective in politically conservative local contexts. Contrary to our expectations, however, we found that welfare nonprofits are less effective in demographically heterogeneous local contexts and when the government provides effective social policies, thus indicating a possible substitution effect. Surprisingly, nonprofit effectiveness is increased in highly financialized local contexts. Together, our results indicate that issues of competition, institutional alignment and community support in the context of grand challenges are more complex than originally thought.