Intermediation by Aid Agencies
University of Birmingham - Department of Economics
University of Toulouse I - Industrial Economic Institute (IDEI); Centre for Economic Policy Research (CEPR)
University of Birmingham Economics Working Paper No. 05-16
This paper models aid agencies as financial intermediaries that do not make a financial return to depositors, whose concern is to transfer resources to investor-beneficiaries. This leads to a problem of verifying that the agency is using donations as intended. One solution to this problem is for an agency to employ altruistic workers at below-market wages: altruistic workers, who can monitor the agency's activities, would not work at below-market rates unless it were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible. In a model with pure moral hazard, observability of wages makes incorporation as a not-for-profit firm redundant as a commitment device. In a model with both moral hazard and adverse selection, incorporation as a not-for-profit firm can serve as a costly commitment mechanism reassuring donors against misuse of their funds. Hiring a worker of low ability can also be a valuable commitment device against fraud.
Number of Pages in PDF File: 32
Keywords: Signalling, non-profit, wage differential, donations, altruism, two-sided market
JEL Classification: D21, D64, J31, L31working papers series
Date posted: November 17, 2004
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 7.391 seconds