The Dark Side of Transparency: Mission Variety and Industry Equilibrium in Decentralized Public Good Provision

Abstract

We study the implications of transparency policies on the decentralized public good

provision, by focusing on how the moral hazard problem inside non-profits interacts

with the competitive structure of the sector under alternative informational regimes.

More transparency on the use of funds has an ambiguous effect on the total public

good provision and the welfare of donors. On the one hand, more transparency encourages non-profit managers to devote more resources to curbing rent-seeking inside

organizations. On the other hand, it tilts the playing field against non-profits managers

who face higher cost of monitoring, inducing them to abandon their missions. From

the donors' perspective, there are two corresponding opposing effects: transparency is

good because of the reduction in rent-seeking in the non-profits active in the market,

but it can backfire because of a lower diversity of non-profits. Donors' welfare is lower

under transparency (than under no information on the use of funds) for intermediate

levels of asymmetry in the cost of monitoring.

Keywords: altruism, Charitable Giving, Non-profit organizations, transparency

JEL Classification: D23, D43, D64, L31