The Nonprofit's Dilemma

20 Pages Posted: 1 Sep 2021

See all articles by Jens Prufer

Jens Prufer

Tilburg University - CentER; Tilburg University - Department of Economics; Tilburg University - Law and Economics Center (TILEC)

YiLong Xu

Utrecht University, School of Economics (U.S.E.)

Date Written: July 23, 2021

Abstract

Nonprofit firms producing services that are of broad public concern — mission-driven organizations — pay lower wages and often use low-powered incentive schemes, which has been explained by binding financial constraints and the threat to attract wrong worker types if wages are increased. Yet, they face higher labor turnover than for-profit firms, which is very costly. We construct a simple model that reproduces these stylized facts, explains the high labor turnover of mission-driven organizations, and suggests a way out of this nonprofit’s dilemma, based on insights from the economic psychology literature. We construct testable empirical hypotheses and offer managerial and policy implications.

Keywords: intrinsic motivation, altruism, beliefs, nonprofit, nonprofit sector, NGOs, charities, self-deception

JEL Classification: L31, J31, D64, D91, M51

Suggested Citation

Prufer, Jens and Xu, YiLong, The Nonprofit's Dilemma (July 23, 2021). TILEC Discussion Paper No. DP2021-012, Available at SSRN: https://ssrn.com/abstract=3913184 or http://dx.doi.org/10.2139/ssrn.3913184

Jens Prufer (Contact Author)

Tilburg University - CentER ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

YiLong Xu

Utrecht University, School of Economics (U.S.E.) ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

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