AbstractThe dramatic increase in public funding for nonprofit organizations has raised concerns about the potential disadvantages of a nonprofit sector that is too reliant on government funding. Using nonprofits to deliver public programs also presents risks for the public sector, but the question of nonprofit policy influence is largely absent from discussions of public–nonprofit service collaborations. The motivation for this article stems from the contradiction between the perceived weakness of publicly funded nonprofits and their potential for policy influence. This research asks, how do nonprofits exert policy influence? Using a grounded theory approach, the research draws on the attitudes and experiences of professionals and elected officials involved in policy making and policy implementation in the area of low‐income housing. The findings indicate a variety of mechanisms through which the government–nonprofit relationship can strengthen the power of nonprofit organizations, sometimes while weakening their government counterparts.