Competition between For-Profit and Non-Profit Firms: Incentives, Workers’ Self-Selection, and Wage Differentials
Quaderni - Working Paper DSE N° 1072
55 Pages Posted: 19 Jul 2016
Date Written: July 18, 2016
We study optimal non-linear contracts offered by two firms competing for the exclusive services of workers, who are privately informed about their ability and motivation. Firms differ in their organizational form, and motivated workers are keen to be hired by the non-profit firm because they adhere to its mission. If the for-profit firm has a competitive advantage over the non-profit firm, the latter attracts fewer high-ability workers with respect to the former. Moreover, workers exert more effort at the for-profit than at the non-profit firm despite the latter distorts effort levels upwards. Finally, a wage penalty emerges for non-profit workers which is partly due to compensating effects (labor donations by motivated workers) and partly due to the negative selection of ability into the non-profit firm. The opposite results hold when it is the non-profit firm that has a competitive advantage.
Keywords: non-profi t fi rms, multi-principals, intrinsic motivation, skills, bidimensional adverse selection, wage differential
JEL Classification: D82, D86, J24, J31, M55
Suggested Citation: Suggested Citation